Bank of Finland Press Conference 13th June 2017 Juha Kilponen

1. Unrestricted
Bank of Finland
Outlook for the Finnish
Economy 2017-2019
13.6.2017
Juha Kilponen
1

2. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Increasingly favourable global
environment for economic growth
 Finland’s export demand will strengthen along
with the pick-up in the global economy
 Global economic recovery generates a need for
investment and provides structural support for
Finnish exports
 External price factors also favourable
– Oil prices will remain at current levels and the rise in commodity
prices will moderate.
– Competitors’ export prices will increase faster than in Finland.
– Interest rates will remain low.
13.6.2017 Juha Kilponen 2

3. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Upward trend also in Finland
 Financing conditions remain favourable and
monetary policy continues to support economic
recovery
 Improvements in price competitiveness
– Competitiveness Pact
– Trade-weighted exchange rate has weakened
 Significant improvement in confidence
– Economic data published in the early part of 2017 has surprised
mainly on the upside
 Pick-up in productivity growth
13.6.2017 Juha Kilponen 3

4. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Short-term forecasting models predict robust
growth for early 2017
2017Q1 2017Q2 2017Q3
Flash estimate 1.6%
1st data release 1.2%
Bridge models 0.9% 0.8% 0.9%
Factor model 1.2% 1.0% 0.9%
BVAR 0.8% 0.5% 0.6%
Statistics Finland’s flash estimate and first data
release, and indicative forecast for early 2017,
GDP change on previous quarter, %
4Juha Kilponen13.6.2017
-3
-2
-1
0
1
2
3
2007 2009 2011 2013 2015 2017
GDP
Statistics Finland’s flash estimate
Mean forecast of bridge models
Dynamic factor model
Bayesian vector autoregressive model
Change on previous quarter, %
Sources: Statistics Finland, and Bank of Finland forecasts.
-6,8 %
30219

5. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Upswing strengthens – GDP finally
above the level of 2008
13.6.2017 Juha Kilponen
GDP, %
March’17 June
2016 1.6 1.4
2017f 1.6 2.1
2018f 1.5 1.7
2019f 1.3 1.4
5
-10
-5
0
5
10
140
160
180
200
220
2000 2005 2010 2015
% change on previous year (right-hand scale)
At reference year (2010) prices (left-hand scale)
EUR billion %
Sources: Statistics Finland and Bank of Finland.
13 Jun 2017
bofbulletin.fi
24078 @E&T 3_2017
GDP volume

6. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Balance of supply and demand:
projections for GDP sub-components
13.6.2017 Juha Kilponen
% change from previous year 2016 2017f 2018f 2019f
GDP 1.4 2.1 1.7 1.4
Private consumption 2.0 1.3 1.3 1.2
Public consumption 0.5 -0.2 0.1 -0.2
Private fixed investment 4.6 5.1 2.9 3.3
Public fixed investment 1.4 2.4 0.2 –0.1
Exports 0.5 3.9 3.4 2.9
Imports 2.5 2.7 2.3 2.1
Sources: Statistics Finland and Bank of Finland.
6

7. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Exports join private demand in
supporting growth
13.6.2017 Juha Kilponen 7
-10
-5
0
5
2008 2010 2012 2014 2016 2018
Net exports Private consumption Public sector demand
Private investment Inventory change and
statistical discrepancies
% change in GDP volume
The chart is merely indicative. The GDP growth contribution of each demand component
has been calculated on the basis of its volume growth and its value share in the
previous year. The figures for 2016–2019 are forecasts.
Sources: Statistics Finland and Bank of Finland.
13 Jun 2017
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20756 @Kontribuutio
% points

8. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Notable turn in export growth, but
defending market shares still difficult
13.6.2017 Juha Kilponen 8
Exports and export markets,
%
Exports
Export
markets
2016 0.5 1.9
2017f 3.9 4.2
2018f 3.4 3.7
2019f 2.9 3.760
70
80
90
100
110
120
130
140
150
2007 2009 2011 2013 2015 2017 2019
Finland Sweden Germany Finland’s export markets
Index, 2007 = 100
Sources: Bank of Finland and European Commission.
13 Jun 2017
eurojatalous.fi
34210@Vientimarkkinat

9. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Why does export growth still deviate
from its historical trend?
13.6.2017 Juha Kilponen 9
-1
-0.8
-0.6
-0.4
-0.2
0
0.2
0.4
0.6
2014–2016 2017–2019
Factors contributing to exports
Domestic cost and structural factors External factors
Interest and exchange rates Taxation and social security contributions
Other Deviation of exports from historical average growth
%, contribution to growth
Lähde: Suomen Pankin laskelmat.
13.6.2017
eurojatalous.fi
34210@Shokkikontribuuti

10. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
 Balance of trade
surplus is not
sufficient for turning
the current account
positive
 Current account
deficit reflects strong
growth in private
demand and a
deterioration in the
terms of trade
13.6.2017 Juha Kilponen 10
Persistent deficit on the current account
-4
-2
0
2
4
6
8
10
12
2000 2005 2010 2015
Balance of trade Services account
Primary income Current transfers from abroad
Current account in deficit
% of GDP
Source: Statistics Finland.
Current account in deficit
13 Jun 2017
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34210@Vaihtotase_alaerät

11. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Investments supported by improved
growth outlook and profitability
13.6.2017 Juha Kilponen 11
-20
-15
-10
-5
0
5
10
15
2005 2007 2009 2011 2013 2015 2017 2019
Cultivated assets and intellectual property products
Machinery and equipment, transport equipment and weapons systems
Other construction investment
Residential construction
Total investment
Annual volume growth, %
Sources: Statistics Finland and forecast by the Bank of Finland.
30219@Investoinnit2

12. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Improving profitability of non-financial
corporations supports investment
13.6.2017 Juha Kilponen 12
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0
0.05
0.1
0.15
0.2
0.25
0.3
1975 1985 1995 2005 2015
Private productive investment as a share of value added
Private sector operating profit (operating surplus / output)
% of value added % of output
Source: Statistics Finland.
34242

13. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Savings ratio declines, household debt
continues to grow
13.6.2017 Juha Kilponen 13
-4
-3
-2
-1
0
1
2
3
4
5
2009 2011 2013 2015 2017 2019
Savings ratio Households’ real disposable income Real private consumption
%
Households = households and non-profit corporations serving households.
* % change on previous year.
Sources: Statistics Finland and Bank of Finland.
13 Dec 2016
bofbulletin.fi
19912@ET_2017_3_tulot ja kulutus EN

14. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Labour market strengthens
13.6.2017 Juha Kilponen
Employment and unemployment
rate
Employment
rate, %
Unemployment
rate, %
2016 68.7 8.9
2017f 69.3 8.6
2018f 69.9 8.2
2019f 70.3 8.1
14
4
6
8
10
12
64
66
68
70
72
2002 2007 2012 2017
Employment rate, 15–64-year-olds, trend (left-hand scale)
Unemployment rate, 15–74-year-olds, trend (right-hand scale)
% %
Sources: Statistics Finland and Bank of Finland (forecasts).
25192

15. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Many factors slowing improvement in
employment rate
 Structural employment
a problem. However,
difficult to assess the
amount of slack.
 Labour market
mismatch
– Construction and IT sectors
have already reached full
employment, and skilled
labour is hard to find.
 On the other hand,
the number of
persons returning to
the labour market is
on the increase.
13.6.2017 Juha Kilponen 15
0
5
10
15
20
25
30
35
2007Q1 2010Q1 2013Q1 2016Q1
%
Manufacturing Services
Source: European Commission, BCI Survey
Labour supply as a factor constraining production*
*Share of companies whose production/business is constrained by
32220

16. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Finnish inflation slower than euro area
13.6.2017 Juha Kilponen 16
HICP, %
Finland
Euro
area
2016 0.4 0.2
2017f 0.8 1.5
2018f 1.0 1.3
2019f 1.3 1.6
-0.5
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
1999 2002 2005 2008 2011 2014 2017
Finland Suomi: ennuste
Euro area Euro area, forecast
Average annual inflation, %
Sources: Bank of Finland and European Central Bank.
13 Jun 2017
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31705@E&T_3_2017

17. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
General government structural balance
remains in deficit
13.6.2017 Juha Kilponen 17
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2015 2016 2017 2018 2019
Interest expenditure Taxes and social security contributions
Primary expenditure, total Other revenue
Change in structural primary balance
% points
13.6.2017
eurojatalous.fi
34003@Kuvio1
Sources: Statistics Finland and calculations by the Bank of Finland.

18. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Debt ratio will grow until 2019
13.6.2017 Juha Kilponen 18
40
42
44
46
48
0
20
40
60
80
1999 2004 2009 2014 2019
General government EDP debt (left-hand scale)
Total tax ratio (right-hand scale)
% of GDP
Sources: Statistics Finland, State Treasury and Bank of Finland.
%
13 Jun 2017
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@E&T_3_2017_velka_julkyht(en)

19. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Forecast risks and alternative scenario
 Risks to the forecast on the upside in the short term,
but weaker-than-expected developments possible
over the longer term
– Rapid growth in investments and exports may
continue stronger and for a prolonged period.
– Realisation of global uncertainties could weaken
exports.
– A stronger rise in wages than in productivity would
erode the benefits of the Competitiveness Pact.
 Alternative scenario: Stronger growth in export
demand and total factor productivity
13.6.2017 Juha Kilponen 19

20. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Thank you!
13.6.2017 Juha Kilponen 20
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