Meri Obstbaum: Finnish economy – Success and challenges

Meri Obstbaum

1Unrestricted

Bank of Finland

Finnish economy: Success and challenges

2.10.2015

Suomen Pankki – Finlands Bank – Bank of FinlandMeri Obstbaum 2Unrestricted

Facts about the Finnish economy

13th largest of the 28 EU countries– 5.5m inhabitants– GDP per capita ≈ Western European average

Regional differences large– Greater Helsinki area:

¼ of population ⅓ of GDP

Nordic model– Comprehensive welfare state: generous transfers, high taxes

– Strong labor unions and employer organizations

– Small income disparities

– High female participation in labor force

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Finland as part of international economy

Open economy– Exports/GDP ≈ 40 %

Direction of foreign trade:– Most important trading partners: Germany, Sweden, Russia– Share of EU countries ≈ 60%, share of euro area countries ≈ 35%

International specialization:– Paper and wood products– Metal products

Member of EU since 1995

One of the original 11 euro countries (since 1999)

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From top-performing advanced economy to growth laggard

2.10.2015

Source: IMF


Factors behind exceptionally good performance in 1995-2007

Investment in human capital / education system – Universities’ focus in engineering starting in 1960’s/1970’s

Recovery from exceptionally deep depression– Export-led growth strategy– Continued investment in R&D and education– Strong depreciation of the Finnish Markka– Cuts in labor costs and corporate taxes– Structural change – reallocation of resources

Growth of ICT sector– Framework conditions

EU accession– Fiscal discipline / financial conditions / consolidation

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0

10

20

30

40

50

60

0

2

4

6

8

10

12

14

16

18

1985 1990 1995 2000 2005 2010

Unemployment rate (left scale)Central government debt (right scale)

% % of GDP

Sources: European Commission and Statistics Finland. 31406

Recovery from depression of early 1990s

- At its time, the depression was the worst experienced by any advanced economy after WWII.

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Industry-led growth

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199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201450

100

150

200

250Production, 1990=100

Primary production Industry Construction

Industry excl. electrical and electronics industry Services


Strong export performance reflected in external balance

1995 2000 2005 2010-4

-2

0

2

4

6

8

10

Source: Statistics Finland

Current account, % of GDP

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Structural change in manufacturing

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19751977

19791981

19831985

19871989

19911993

19951997

19992001

20032005

20072009

20112013

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Manufacturing, % of gross value added

Forest industry Chemical industryMetal industry excl.electrical and electronics industry Electrical and electronics industryRest of manufacturing


Period of low growth – what happened?

Unique combination of cyclical and structural shocks– Financial crisis – foreign demand shock – No role for shocks originating from the financial sector– Electrical and electronics industry, Forest industry– Russia

Population ageing– Working age population (15-64) shrinking since 2011– Increase in age-related public expenditure

Leading to: low productivity, low investments

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Industry-led decline

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199019911992199319941995199619971998199920002001200220032004200520062007200820092010201120122013201450

100

150

200

250Production, 1990=100

Primary production Industry Construction

Industry excl. electrical and electronics industry Services


Weak export performance - also outside electronics and forest industries

-20-10

010203040506070

Finl

and

Luxe

mbo

urg

Irela

nd

Aust

ria

Frna

ce

Italy

Slov

enia

Belg

ium

Gree

ce

Ger

man

y

Net

herla

nds

Mal

ta

Port

ugal

Cypr

us

Spai

n

Slov

akia

Esto

nia

Latv

ia

Lith

uani

a

Share of electronic and electric appliances and forest industry products

Sources: OECD, Eurostat and Customs.

%Value of goods exports, change between 2008 and 2013

31607

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Cost competitiveness weakened

90

95

100

105

110

115

120

1999 2001 2003 2005 2007 2009 2011 2013 2015

Realised Based on Commission forecasts (May 2015)Index, 1999 = 100

Sources: European Commission, Statistics Finland, and BOF calculations.27664

Whole economy, Finland vs.average of trading partners

Relative unit labour costs

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A structural public deficit has emerged

100

125

150

175

200

225

250

40

50

60

70

80

90

100

1999 2001 2003 2005 2007 2009 2011 2013

Central and local government expenditure* (left scale)Central and local government income* (left scale)GDP (right scale)

Bill EUR

*) Consolidated.Source: Statistics Finland.

27749

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Current economic outlook and policy

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No quick recovery expected - growth falls further behind euro area growth

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90

95

100

105

2008 2010 2012 2014 2016

Finland Euro areaVolume, index, 2008Q1 = 100

Forecasts: Bank of Finland (Finland) and ECB (euro area).Sources: Eurostat, Bank of Finland, and ECB. 31729

GDP


Finnish economic indicators still mostly weak:Especially in the labor market

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Long-term growth prospects also weak

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2005-2014 2015-2024 2024-20350.0 %

0.2 %

0.4 %

0.6 %

0.8 %

1.0 %

1.2 %

1.4 %Economic growth in Finland 2005-2035

0,8 % 1,3 %1,0 %

Source: Bank of Finland, long-term growth projection


Demographics will continue to put pressure on public finances

Old-age dependency ratio(Population aged over 64 per population aged 15–64)

0

10

20

30

40

50

60

1950 1960 1970 1980 1990 2000 2010 2020 2030 2040 2050

Suomi Eurooppa USA

Yli 64-vuotiaiden osuus yli 15–64 -vuotiaista.Lähde: YK.

Vanhushuoltosuhde

%

Source: United Nations.

Finland

Europe

USA

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Fundamentals remain strong - macroeconomic situation weak

Strengths Reliable legal system Infrastructure Education system Innovation potential Healthy banking sector Relatively small stock of

public debt (60% of GDP)

Weaknesses Erosion of industrial base:

electronics industry (paper industry)

Cost competitiveness

Decline of working-age population since 2011

Recent problems in Russian economy

Long-term unemployment – deterioration of skills

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-6 -3 0 3 6 9 12

GreeceRomania

EstoniaLatvia

LithuaniaIreland

PortugalMalta

Czech RepublicItaly

SlovakiaSpain

PolandCyprus

SloveniaHungary

GermanyFranceAustria

NetherlandsUnited Kingdom

BelgiumLuxembourg

DenmarkBulgariaSwedenFinland

Source: European Commission.

BKT-suhteen muutos vuodesta 2008 vuoteen 2014, prosenttiyksikköä

27795

Fiscal policy has been eased since 2008

Fiscal policyeased ← │→ tightened

General government structural balance / GDP,change between 2008 and 2014, percentage points

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Lower interest rate levels transmitted to households and firms

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 2014 2015

Finland Euro area%

Source: ECB. 27736

Average interest rate on new housing loans

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Policy action needed in several fronts

Structural reforms that increase potential output and improve sustainability of public finances– Pension system (reform agreement exists)– Social and health services overhaul– Remove barriers to competition– Supply of housing

Halting the increase in public debt

Unit labor costs to grow less than in trading partners for several years

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Summing up

More than 10 years of higher than average growth, following strong recovery from the deep depression of early 90’s

Combination of cyclical and structural shocks turned Finland into one of the worst performing advanced economies after 2008

Economic fundamentals remain strong, but macroeconomy is weak

Monetary and fiscal policies have been expansionary and competitiveness has stopped deteriorating, but much remains to be done

Policy action should focus on structural reforms, fiscal consolidation and improving cost competitiveness

2.10.2015

Meri Obstbaum: Finnish economy – Success and challenges

Economy & Finance

Transcript of Meri Obstbaum: Finnish economy – Success and challenges