1. Economic outlook for 2013−2015 Euro & talous (Bank of Finland Bulletin) 5/2013 Governor Erkki Liikanen 12 December 2013 1

2. 12.12.2013Governor Erkki Liikanen 2 Positive signals from the international economy

3. Share indices up, but big differences between countries 12.12.2013Governor Erkki Liikanen 3

4. Narrowing of government bond yield spreads reflects improved expectations 12.12.2013Governor Erkki Liikanen 4 27391

5. Measures by stressed countries have boosted competitiveness and improved balance in the economy 12.12.2013Governor Erkki Liikanen 5 26295@Chart23(e)

6. The signals from the international economy are encouraging, but the financial crisis casts a long shadow 12.12.2013Governor Erkki Liikanen 6

7. 12.12.2013Governor Erkki Liikanen 7 Finland’s growth outlook slowly improving

8. GDP stabilised during 2013 12.12.2013Governor Erkki Liikanen 8 25525

9. Finnish economy begins slow growth 12.12.2013Governor Erkki Liikanen 9 24078

10. Supply and demand 12.12.2013Governor Erkki Liikanen 10 2012*201120122013e2014e2015e EUR bn% change from previous year in real terms GDP192.52.7-0.80.61.7 June forecast-0.80.71.4 Change-0.2-0.10.3 Imports79.86.2-7.30.94.2 Exports78.12.7-0.2-1.71.74.7 Private consumption108.52.60.2-0.5-0.21.0 Public consumption48.30.50.61.30.70.6 Private investment32.76.2-1.3-1.80.34.3 Public investment5.03.00.90.4-0.40.0 *At current prices, EUR bn.

11. 12.12.2013Governor Erkki Liikanen 11 Labour market conditions will not improve until 2015

12. Employment will improve as output growth strengthens 12.12.2013Governor Erkki Liikanen 12 26516

13. Productivity to grow sluggishly… 12.12.2013Governor Erkki Liikanen 13 24079

14. …but unit labour costs will grow substantially slower 12.12.2013Governor Erkki Liikanen 14 20749

15. Deterioration of cost-competitiveness will halt 12.12.2013Governor Erkki Liikanen 15

16. 12.12.2013Governor Erkki Liikanen 16 Recovery in exports boosts domestic demand

17. A pick up in international trade spurs Finnish exports 12.12.2013Governor Erkki Liikanen 17 21242

18. Investment activity remains muted 12.12.2013Governor Erkki Liikanen 18 23231

19. Weak earnings development weighs down consumption 12.12.2013Governor Erkki Liikanen 19 19912

20. Current account in balance 12.12.2013Governor Erkki Liikanen 20 26152

21. 12.12.2013Governor Erkki Liikanen 21 Inflation slows

22. Inflation has slowed down despite tax increases 12.12.2013Governor Erkki Liikanen 22 20984

23. Weak demand keeps price pressures in check 12.12.2013Governor Erkki Liikanen 23 25534

24. 12.12.2013Governor Erkki Liikanen 24 Subdued growth erodes public finances

25. Central and local government deficit remains sizable… 12.12.2013Governor Erkki Liikanen 25 24903

26. …also general government in substantial deficit 12.12.2013Governor Erkki Liikanen 26 24903

27. Public debt to exceed 60% already in 2014 12.12.2013Governor Erkki Liikanen 27 24903

28. 12.12.2013Governor Erkki Liikanen 28 Consolidation of public finances progressing – difficult decisions still ahead

29. Local government consolidation clearly slows down growth in public debt General government has accumulated an excessive structural deficit. The debt ratio will not be brought down to 60% without additional measures. Local government consolidation measures decided in the government’s structural program will balance the municipal finances and bring the general government structural deficit close to the target level. will reduce the risk of over-indebtedness, but the debt ratio will remain above 60%. 12.12.2013Governor Erkki Liikanen 29

30. Longer working careers and public sector productivity play a key role in the 2020s 12.12.2013Governor Erkki Liikanen 30

31. Fiscal policy steering needs strengthening The framework of central government spending limits needs to be reformed. –If the slowdown of economic growth is structural, spending limits ought to be adjusted accordingly. The project to reform the system of financial steering for local government sector is important. 12.12.2013Governor Erkki Liikanen 31

32. Structural reforms essential to close the fiscal sustainability gap If all the planned structural policy measures will be applied in practice, they would be sufficient to close the sustainability gap. Determined progress is necessary to achieve the objectives of the government’s structural policy programme. –Pension reform is essential. Finland’s ability to make decisions is crucially important. 12.12.2013Governor Erkki Liikanen 32

33. 12.12.2013Governor Erkki Liikanen Financial stability 33

34. Banking union going forward Comprehensive assessment of banks before the European Central Bank assumes responsibility for supervisory tasks Ensuring viability of banks before single supervision Banks to be recapitalised, if required by results of comprehensive assessment 12.12.2013Governor Erkki Liikanen 34

35. Single resolution mechanism is the key Orderly winding-down of unviable banks requires a resolution mechanism Resolution mechanism is based on principle of bail-in Implementation of bail-in a prerequisite for effective resolution 12.12.2013Governor Erkki Liikanen 35

36. Macroprudential tools to be introduced in Finland The need for national macroprudential tools is more compelling within monetary union –special challenge: country-specific housing market risks Systemic risks have to be addressed by several tools: –countercyclical capital buffer (excessive lending growth) –loan-to-value limit (housing market risks) –capital buffer for systemically important banks and systemic risk buffer (concentrated banking sector) 12.12.2013Governor Erkki Liikanen 36

37. 12.12.2013Governor Erkki Liikanen Domestic banking sector 37

38. Banking system’s risk-bearing capacity has remained good 12.12.2013Governor Erkki Liikanen 38

39. Profitability of deposit banking under strain 12.12.2013Governor Erkki Liikanen 39

40. Household indebtedness levelling off 12.12.2013Governor Erkki Liikanen 40

41. Imputed average margins on new corporate loans in Finland Finnish non-financial corporations’ interest- bearing debt Imputed margins on new corporate loans granted by banks have widened 12.12.2013Governor Erkki Liikanen 41

42. New corporate loan agreements of up to EUR 1 million in Finland Access to bank finance of Finnish SMEs No significant changes in access to finance for SMEs, but company-specific risk assessments tighter 12.12.2013Governor Erkki Liikanen 42

43. Euro & talous (Bank of Finland bulletin) 5/2013 Feature articles: Rahoitusjärjestelmän vakaus (Financial stability in Finland) Talouden rakenneuudistukset ja julkisen talouden kestävyys (Structural reforms and sustainability of public finances) Helvi Kinnunen, Petri Mäki-Fränti and Jukka Railavo 12.12.2013 43 Governor Erkki Liikanen

44. 12.12.2013Governor Erkki Liikanen 44 Thank you!