Juha Kilponen, Bank of Finland Euro & talous 5/2016

1. Unrestricted
Head of Forecasting Division, Bank of Finland
Outlook for the Finnish
economy 2016 - 2019
Juha Kilponen

2. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Global growth slightly slower
Juha Kilponen
Source: ECB, BMPE projections.
Annual change, % June 2016 December 2016
2016 2017 2018 2019 2016 2017 2018 2019
Global GDP (excl. euro
area) 3.1 3.7 3.8 - 3.0 3.5 3.7 3.8
Global trade (excl. euro
area) 1.8 3.5 4.0 - 0.9 2.8 3.7 3.8
Euro area export
demand 2.0 3.5 4.0 - 1.5 2.5 3.4 3.6

3. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
The global economic situation contributes to
the weakening outlook for the Finnish
economy
 All other things being equal, the situation in
the global economy would
– Slow GDP growth by 0.2%
– Cause export growth to decelerate by almost 1%
 Geopolitical factors pose a downside risk to
the forecast
 Uncertainty exceptionally high
Juha Kilponen

4. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
BUT
Juha Kilponen

5. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Positive news from the domestic
economy
 The labour market has
strengthened
 The downtrend in industrial
output has bottomed out
 Competitiveness Pact
improving competitiveness,
monetary policy supporting
growth
 Confidence in the
economy has improved
Juha Kilponen
60
70
80
90
100
110
120
130
2011 2012 2013 2014 2015 2016
Indicator
Sources: European Commission and calculations by the Bank of Finland.
30384@Koko talouden luottamus (EN)
Macroeconomic confidence Indicator
Growth threshold and 90% confidence interval

6. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Long recession receding
Juha Kilponen
GDP, %
June Dec.
2016f 1.1 1.0
2017f 1.1 1.3
2018f 1.0 1.2
2019f 1.2-10
-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 Dec 2016
bofbulletin.fi
24078 @E&T 5_2016
GDP volume

7. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Balance of supply and demand
Juha Kilponen
% change on previous year 2016f 2017f 2018f 2019f
GDP 1.1 1.3 1.2 1.2
Private consumption 1.9 1.4 1.0 0.9
Public consumption 0.3 0.3 0.3 -0.3
Private fixed investment 5.8 3.4 2.5 2.7
Public fixed investment 3.1 0.6 -0.2 –0.1
Exports 0.7 2.1 2.5 2.6
Imports 1.2 2.0 2.1 1.9
Sources: Statistics Finland and Bank of Finland.

8. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Recovery in investment raises
investment ratio
Juha Kilponen
0
5
10
15
20
25
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
%
Corporate fixed investment, % of GDP
Residential construction investment, % of GDP
Average 1990–2008
Source: Statistics Finland.
Dec 13 2016
bofbulletin.fi
33987@Kuvio1

9. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Pace of export growth determined
primarily by euro area
Juha Kilponen
-3
-2
-1
0
1
2
3
4
5
6
7
2010 2012 2014 2016 2018
Exports to euro area Exports to outside euro area Exports
Annual change, %
Sources: Statistics Finland and Bank of Finland.
13 Dec 2016
bofbulletin.fi
34002@x ja m kontribuutio

10. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Current account remains in deficit
Juha Kilponen
-4
-2
0
2
4
6
8
10
12
2000 2005 2010 2015
Primary income and current transfers from abroad
Services account
Balance of trade
Current account
% of GDP
Source: Statistics Finland.
13 Dec 2016
bofbulletin.fi
32344@E&T_3_2016_Vaihtotase (en)
Current account in deficit

11. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Labour market strengthens
Juha Kilponen
Number of employed and
unemployment rate
Employment
rate, %
Unemployment
rate
%
2016f 68.6 8.8
2017f 69.1 8.5
2018f 69.7 8.3
2019f 70.2 8.2
6
7
8
9
10
11
2300
2350
2400
2450
2500
2550
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Number of employed, trend
Number of employed, Bank of Finland forecas, December 2016
Unemployment rate, trend
Unemployment rate, Bank of Finland forecast, December 2016
1,000 persons %
Sources: Statistics Finland and Bank of Finland.
Trends for employment and the unemployment rate
13.12.2016
eurojatalous.fi
26516@Työlliset&työttöm.aste_trendi

12. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Long-term unemployment has risen to
very high levels
Juha Kilponen
10
15
20
25
30
35
40
2010 2011 2012 2013 2014 2015 2016
Proportion of the total number of unemployed people
who are long-term unemployed
%
Source: Ministry of Economic Affairs and Employment.
12-month moving average.
32220@LTUosuus

13. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Growth sustained by consumers
Juha Kilponen
-8
-6
-4
-2
0
2
4
6
8
2007 2012 2017
Savings inflation Nominal income Consumption
Source: Statistics Finland.
%
13 Dec 2016
bofbulletin.fi
32698@ET_3_2016_Kuvio1(e)

14. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Wages and prices rising slowly
Juha Kilponen
1.0
Wages and prices, %
Wages HICPI
2016f 1.1 0.4
2017e -0,5 0.8
2018f 0.6 0.8
2019f 1.0
-3,00
-2,00
-1,00
0,00
1,00
2,00
3,00
4,00
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
HICP, productivity and unit labour costs
Productivity per employed person Unit labour costs, at market price HICP

15. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Inflation slower than euro area
Juha Kilponen
HICP, %
Finland
Euro
area
2016f 0.4 0.2
2017f 0.8 1.3
2018f 0.8 1.5
2019f 1.0 1.7
0
4
8
12
16
20
24
–1
0
1
2
3
4
5
2004 2009 2014 2019
Price level in Finland relative to euro area
Finnish inflation
Euro area inflation
Inflation, % Difference in prices, %
Price index is based on household consumption expenditure.
Sources: Eurostat and Bank of Finland.
31705@hintataso&inflaatio

16. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Weakening of general government
budget balance comes to a halt
Juha Kilponen
General government
net lending, %
EUR
bn
% of
GDP
2016f - 5.3 -2.5
2017f - 5.7 -2.7
2018f - 5.3 -2.1
2019f - 4.9 -1.7
-0,6
-0,4
-0,2
0,0
0,2
0,4
0,6
0,8
1,0
1,2
2015 2016 2017 2018 2019 2016-19
Factors affecting the general government budget
balance
Cyclical factors Interest expenditure
Taxes and social security contributions Primary expenditure, total
Other revenue Change in structural balance
% points
13.12.2016
eurojatalous.fi
34003@Kuvio1
Sources: Statistics Finland and calculations by the Bank of Finland.

17. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
General government debt ratio
will exceed 70%
Juha Kilponen
60,2
63,6
65,6
68,2
70,1
71,3
54
56
58
60
62
64
66
68
70
72
74
2014 2015 f2016 f2017 f2018 f2019
General government debt
% of GDP
13 Dec 2016
bofbulletin.fi
34005@Chart4
Source: Statistics Finland.

18. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Risks to the forecast on the downside
 Uncertainty in the global economy has reached
exceptionally high levels
– Impacts of Brexit ?
– Future US economic policy ?
 Sensitivity of the housing market to business cycle
and the impact of the competitiveness pact (+, -)
 Alternative scenario assesses effects if global growth
declines by half
– GDP would remain cumulatively 1.2% lower
– The need for fiscal consolidation would increase further
Juha Kilponen

19. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Thank you!
www.bof.fi
www.eurojatalous.fi
Juha Kilponen

20. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Additional slides
Juha Kilponen

21. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Growth supported particularly by
domestic demand
Juha Kilponen
-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.
Contribution of different demand components to
GDP growth
13 Dec 2016
bofbulletin.fi
20756 @Kontribuutio
% points

22. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Alternative scenario
Juha Kilponen
–1,0
–0,8
–0,6
–0,4
–0,2
0,0
0,2
2017 2018 2019
Weaker export demand Tighter fiscal policy
% points
Source: Bank of Finland calculations.
13 Dec 2016
bofbulletin.fi
32720@BKT_mw_fipo
Change in GDP relative to baseline scenario
–0,2
0,0
0,2
0,4
0,6
0,8
2017 2018 2019
Weaker export demand Tighter fiscal policy
Source: Bank of Finland calculations.
13.12.2016
eurojatalous.fi
32720@Velkasuhde_mw_fipo
% points
Change in debt ratio relative to baseline scenario