SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Economic outlook for 2012–2014 Euro & talous (Bank of Finland Bulletin) 3/2012 Governor Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Growth outlook subdued 2 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish economy will grow slowly 3 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Growth dependent on domestic demand 4 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND 2011* f2013f2014f EUR billion Volume, % change on previous year GDP191,63,72,91,51,21,6 December forecast2,80,41,8 Change0,11,1-0,6 Imports75,97,70,11,85,35,2 Exports74,97,8-0,82,25,15,2 Private consumption105,33,03,31,41,31,6 Public consumption45,70,20,81,10,20,4 Private investment31,94,15,01,53,33,5 Public investment4,8-6,72,40,20,6 Supply and demand * At current prices, EUR billion. The data on 2011 are Statistics Finland’s advance data; more precise National Accounts data will be published on 12 July Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Employment growth comes to a halt 6 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND No improvement in employment in immediate years ahead 7 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND New jobs in service sectors 8 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Slower productivity growth 9 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Labour costs increase substantially 10 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Household demand fading, exports gradually picking up 11 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Household savings falling 12 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Investment growing slowly 13 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND World trade growth supports exports 14 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Market share of Finnish goods exports contracted sharply 15 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Services exports narrowly based 16 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Current account to remain in deficit 17 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Inflation to gradually slow 18 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Inflation driven by service and food prices 19 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Increases in indirect taxes push up the price level 20 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Fiscal policy tightening will strengthen public finances 21 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND General government balance improves 22 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Central government debt ratio stabilizes 23 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Public expenditure share of GDP remains high 24 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Restructuring of the economy and the long- term outlook for growth 25 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Labour productivity is vital to growth 26 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Population ageing and growth of service sectors will slow long-term growth 27 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND How can we avoid the imbalances threatening the economy? 28 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Current account has weakened during the last decade Erkki Liikanen 29

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Import prices up relative to export prices Erkki Liikanen 30

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Key export sectors declined Erkki Liikanen 31

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Steep rise in Finnish unit labour costs in Erkki Liikanen 32

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Finnish households moved deeper into debt Erkki Liikanen GDP, volumePrivate consumption, volume Residential investment, volume Household loans FinlandEuro area Sources: Eurostat and EuropeanCentral Bank. Change between years 2007 and 2011, % 26062

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND How the imbalances can be avoided  Continued consolidation of public finances  Lengthening working careers and other structural reforms to strengthen potential output  Controlling the increase in household debt  Ensuring cost-competitiveness 34 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Bank of Finland Bulletin Economic Outlook 3/2012 Articles:  Assessing the Finnish house price development with various measures -Jarkko Kivistö  Market share of Finnish goods exports contracted sharply in the 2000s -Seppo Orjasniemi and Terhi Ravaska  The long-term growth forecast for the Finnish economy -Helvi Kinnunen, Petri Mäki-Fränti, Elisa Newby, Seppo Orjasniemi and Jukka Railavo Erkki Liikanen 35

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Thank you! 36 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Alternative scenario: Households strengthen their financial position by adjusting demand 37 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Savings ratio rises to long-run average level 38 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Also a decline in housing investment 39 Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Improved financial balance in household sector would weaken growth and public finances GDP, % change Difference Private consumption, % change Difference Household savings ratio, % of disposable income Difference Current account, % of GDP Difference Net lending by public sector, % of GDP Difference Erkki Liikanen

SUOMEN PANKKI | FINLANDS BANK | BANK OF FINLAND Household indebtedness and interest burden in Finland Erkki Liikanen 41