SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Economic outlook for Euro & talous (Bank of Finland Bulletin) 3/2013 Governor Erkki Liikanen Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND International economy: market situation favourable, real economy sluggish 2 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Share indices up Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Government bond yield spreads narrowed Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Euro area progress in rebalancing Current accountGeneral government deficit Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND But financial crisis casts a long shadow Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish economy turned down again, growth and employment prospects weak for the next few years Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish economy faced structural change and cyclical downturn at same time Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Restructuring of industry exceptional in international comparison Erkki Liikanen 9

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finland has lost export market shares Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Structural change in goods exports Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Substantial contraction in key export industries’ share of GDP 12 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Is the era of current account surpluses now over? 13 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND One worrying feature of structural change is the effect on unemployment among young men  Labour market situation on entering working life has a long-term influence on cohorts’ labour force participation rates.  The Great Depression of the 1990s lowered labour market participation of women born in the 1960s and 1970s.  Now under threat is the labour market attachment of men born in the 1980s.  Ongoing structural change in the economy could leave a long-lasting mark in the labour market position of men.  Previous assessments of future trends in the labour force could be overly optimistic. Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Cyclical outlook weak Erkki Liikanen 15

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Economic recovery muted Erkki Liikanen Gross Domestic Product

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Weak growth reflected in unemployment Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 2012* f2014f2015f EUR bn % change from previous year in real terms GDP194,52,8-0,2-0,80,71,4 December forecast0,30,41,5 Change-0,5-1,2-0,8 Imports78,46,1-3,70,82,84,6 Exports77,32,9-1,41,23,54,7 Private consumption109,52,31,6-0,90,21,2 Public consumption48,30,40,8 0,10,4 Private investment32,77,7-3,4-3,62,03,9 Public investment5,02,90,50,4-0,10,0 Growth forecast weaker * At current prices, EUR bn. Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Structural change reduced exports, household consumption fading 19 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Recovery in international trade will not remedy fall in exports Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Household consumption no longer supports economic growth Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Important to improve cost-competitiveness 22 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Cost-competitiveness declined 23 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Cost-competitiveness also influenced by labour costs in the closed sector 24 Erkki Liikanen Unit labour costs in the closed economy sectors producing intermediate inputs to manufacturing industries*

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Fading demand slows inflation 25 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Inflation slowing despite tax rises Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish inflation nevertheless faster than euro area as a whole 27 Erkki Liikanen FinlandEuro area % change on previous year Source: Eurostat. Food at fixed tax rates FinlandEuro area % change on previous year Source: Eurostat. Services at fixed tax rates

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Slower growth weakens public finances Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Substantial funding gap in public finances 29 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Slowdown in economic growth will keep public finances in deficit 30 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Deficit and slow growth increase level of public debt 31 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND On policy options Erkki Liikanen 32

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Problems in economy mainly structural  Recovery in international economy will not remedy collapse in exports –Contraction of electronics and paper industry structural –Cost-competitiveness declined  Domestic demand funded increasingly with debt –Cannot serve as sustainable driver of growth  Demographic trends slowing growth and burdening public finances –Form a constraint on fiscal stimulus 33 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND How to support growth and employment?  Finnish economy’s basic strengths unchanged –Strong basic education, knowledgeable workforce, functioning infrastructure, efficient administration and reliable justice system –Provide a good foundation for renewing the economy  Growth, employment and public finances can be successfully strengthened –But cost-competitiveness is needed Situation of the open sector must be taken into account in pay agreements Faster unit labour cost rises than in competitor countries in previous years require slower developments over next several years –And real competitiveness is needed Structural reforms that boost potential output and innovations 34 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Areas of structural change that support growth potential  Labour supply  Competition in the service and construction sectors  Supply of land and housing  Productivity in publicly funded services  Tax system  Innovation policy 35 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Stronger growth outlook through structural reforms and competitiveness  Boosting growth potential would improve confidence in future –Employment and productivity outlook would improve –Long-term sustainability of public finances would be strengthened  If growth outlook improves in a sustainable way, companies could take recruitment and investment decisions 36 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Euro & talous (Bank of Finland bulletin) 3/2013 Feature articles:  Työvoiman tarjonta ja kohortit: suhdanteiden vaikutus työmarkkinoille kiinnittymiseen (Cohort analysis of labour supply) Helvi Kinnunen and Petri Mäki-Fränti  Toimialoittainen työkustannuskehitys teollisuuden kustannusrakenteen näkökulmasta (Sector-specific labour cost developments from the perspective of the industrial sector’s cost structure) Jarkko Kivistö 37 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Thank you! Erkki Liikanen