The Finnish economy in early summer 2020: The worst has not - - PowerPoint PPT Presentation

The Board, Bank of Finland

Bank of Finland Bulletin press conference 9 June 2020

Olli Rehn

The Finnish economy in early summer 2020: The worst has not transpired – but we mustn’t fade in the second half

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Summary

• The euro area economy will slump into a deep recession in 2020.
• The ECB’s accommodative monetary policy will ensure favourable

financing conditions for a long period of time.

• Common European measures: a comprehensive assessment, not a

partial one!

• There is a risk of a renewed weakening of Finnish cost-competitiveness.
• Conditions for employment growth must be in place during the recovery

phase.

• The foundations for growth and sustainable public finances must be

strengthened.

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Euro area GDP to contract sharply and recover gradually

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75 80 85 90 95 100 105 110 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 Euro area GDP ECB March forecast Mild ECB June forecast Severe 2019Q4 = 100 Figures below the curve are annual growth rates, % Sources: ECB calculations and Bank of Finland. 35781@MMS2(2004)(2)

1,2

• 5,9
• 8,7
• 12,6

6,8 5,2 3,3 0,8 1,3 1,4 2,2 3,3 3,8

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Responses by central banks and supervisory authorities to the coronavirus crisis

• Monetary policy has been eased further – supports financial

stability and liquidity

• Bank capital requirements have been lowered – maintains

lending capacity

• Global cooperation between central banks to safeguard

dollar liquidity by means of favourable liquidity swap arrangements (USD swap lines) – Fed, ECB and four other central banks, etc.

• The Bank of Finland has purchased Finnish commercial paper

as part of its investment activities.

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Euro area inflation slow and outlook subdued

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0,8 1,3 0,3 0,7 0,9 0,8

• 1,5
• 1,0
• 0,5

0,0 0,5 1,0 1,5 2,0 2,5 2015 2016 2017 2018 2019 2020 2021 2022

Services Non-energy industrial goods Processed food Energy Unprocessed food HICP inflation Core inflation HICP, ECB forecast Core inflation, ECB forecast

Inflation and contribution of its components, % NB: Annual inflation rate of 2015 is distorted due to the change in methodology. Sources: Eurostat and ECB. 32426@YKHIkontrib(2)en

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Weak demand has weighed on the inflation expectations

At the same time, the probability of a decline in prices during the next 5 years has increased according to

• ptions prices.

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The ECB keeps financing conditions very accommodative, thus supporting euro area economies through the crisis

• On 18 March, the ECB decided on a EUR 750 billion

Pandemic Emergency Purchase Programme (PEPP) until the end of 2020.

• On 4 June, the ECB decided to increase and

extend the PEPP

• The envelope will be increased by EUR 600

billion, to a total of EUR 1,350 billion (red line)

• Purchases will be extended to at least the end of

June 2021.

• Maturing principal payments will be reinvested at

least until the end of 2022.

• Net purchases under the APP will continue at a

monthly pace of EUR 20 billion, together with the purchases of EUR 120 billion until the end of the year (black line).

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The Eurosystem monetary policy operations help channel financing to households and firms

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500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 4 500

2008 2010 2012 2014 2016 2018 2020

Securities held for monetary policy purposes Additional monetary policy operations of 12 months or more and targeted refinancing operations Regular and other short-term monetary policy operations

Credit operations and asset purchases, EUR billion Source: ECB.

32422@ekp_tase2_en

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Some EU countries are on the brink of severe economic distress

• The recession of the European economy poses a threat to Finnish

economy, especially to Finnish exports.

• Many Member States have introduced extensive fiscal policy measures

– not all have fiscal space.

• We also need common European solutions: temporary, rapid and

sufficiently large – sustainability, digital economy

• The Commission’s proposal for a European recovery fund would bring

fiscal policy to the forefront of crisis resolution, alongside monetary policy.

• Rather than a partial assessment, should the recovery fund be subject

to a comprehensive assessment?

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General government debt will rise to new levels in 2020

• Improving the

conditions for sustainable growth: reforms and investments

• Right timing and

targeting of fiscal stimulus

• In the good times,

we must prepare for the bad

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20 40 60 80 100 120 140 160 180 % suhteessa BKT:hen

General government debt % relative GDP

Germany France Italy Spain Source: European Commission forecast, May 2020.

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Economic policy and fiscal support during the coronavirus crisis: focus during various stages

Strict lockdown measures in place Loans and direct support Immediately following the lifting of lockdown measures Stimulus that bolsters aggregate demand General government finances are weakened Growing need to strengthen fiscal sustainability

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Securing and strengthening employment during the recovery phase

• Crises have often left a lasting mark on employment
• Some of those who have lost their job may be left outside the labour

market

• The young are unable to gain a foothold in the labour market
• The correct incentives for employment should be in place during

the recovery phase.

• Social partners took responsibility in the early phase of the

crisis: expedited furlough schemes likely prevented many bankruptcies and redundancies.

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Company data: furloughing has helped stave off redundancies

Size of labour cost adjustments in companies with a decline in turnover 60 % 40 % 20 % 0 % Petri Mäki-Fränti and Juuso Vanhala: Yritykset vastaavat koronakriisiin työkustannuksia sopeuttamalla www.eurojatalous.fi

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Situation in March-April 2020 compared with a year earlier

Change in turnover % Change in turnover, % 20 % 15 % 10 % 5 % 0 % Distribution of companies based on changes in turnover

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If forecasts hold true, Finland’s cost- competitiveness will weaken

80 90 100 110 120 130 140 1995 1998 2001 2004 2007 2010 2013 2016 2019 2022 Suomi Euroalue Indeksi, 2005 = 100 Lähteet: Tilastokeskus, Eurostat sekä Suomen Pankin ja EKP:n kesäkuun 2020 ennusteet.

9.6.2020 eurojatalous.fi 38284@Kustannuskilpailukyky (E)

• The forecast points towards a

risk that must be monitored

• Considerable uncertainty now

surrounding the future:

• How will wages adjust in
• ther countries?
• How rapidly will economies

recover?

• At the turn of the year, the
• utlook was completely

different

• If cost-competitiveness

threatens to diminish, will the collective bargaining system

• ffer relief?

Unit labour costs adjusted for terms of trade

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While the worst did not transpire during the corona spring, the future is surrounded by high uncertainty and we mustn’t fade in the second half

• We are hopefully entering a phase where lockdown measures

may continue to be lifted in different countries and where output will begin to grow

• In Finland economic policy has responded on many fronts and the

worst has been avoided

• No large waves of bankruptcies
• Furlough schemes have meant that redundancies have remained fewer in

number than initially feared

• But future developments are surrounded by uncertainty
• Will there be a second wave of the epidemic?
• Domestic demand is recovering, but the outlook for exports is weak
• The threat of an increase in loan losses

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Economic policy must now look at the stimulus phase, but also the longer-term outlook

• Economic policy must prove successful in responding to:
• The circumstances at hand: timing, targeting and size of stimulus

measures

• The need to support the now weaker longer-term outlook
• At centre stage are reforms that will secure the welfare

state and strengthen fiscal sustainability:

• Raising the employment rate in a persistent manner
• Implementation of health and social services reform that will curb

growth in spending

• Meanwhile — tomorrow’s challenges are here today:
• Productivity growth in the economy
• Sustainable development and climate change

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bof.fi

Thank you!