The global economy has continued to grow sluggishly. The economic outlook is, however, no longer deteriorating. In the major economic regions, household and corporate expectations for economic growth have strengthened and financial market conditions have improved since last summer. The financial crisis does, however, cast a long shadow. ‘In the countries that have suffered most from the crisis the level of output is still modest. The steps to reduce debt are essential, although in the short term they will dampen growth,’ said Bank of Finland Governor Erkki Liikanen today at the press briefing for the latest issue of the journal Euro & talous.
The euro area economy stopped contracting in summer 2013. The US economy is being bolstered by improved employment and rising housing prices. The improved economic outlook and stronger confidence are also reflected in higher yields on government bonds and rising share prices.
A characteristic feature of the global economy since the turn of the millennium has been the strong growth in emerging economies. However, in recent months confidence in the continuation of this trend has weakened. Weakened confidence and expectations of a less accommodating monetary policy in the United States have served to divert capital flows away from the emerging economies, thereby weakening their currencies. ‘Differences in growth rates are no longer limited to those between the advanced and emerging economies; the differences within country groups have also grown,’ said Governor Liikanen.
In the major economic regions, prices have developed sluggishly, and euro area inflation is expected to slow to around 1.5% in 2013. The moderate inflation outlook has enabled an accommodative monetary policy. The impact of monetary policy has also been enhanced by the adoption of forward guidance in central bank communications. The monetary policy stance of the euro area continues to be geared towards maintaining the degree of monetary accommodation warranted by the outlook for price stability and promoting stable money market conditions. ‘The key ECB interest rates will remain at present or lower levels for an extended period of time,’ stressed Governor Liikanen. ‘The Governing Council will also remain particularly attentive to the implications that changes in excess liquidity may have for the stance of monetary policy.’
In the euro area, transmission of the accommodative monetary policy stance is still uneven. Measures to improve the situation through general government consolidation and structural reforms to bolster growth in Member States are of fundamental importance.
The progress of banking union is reinforcing confidence in euro area banks and their ability to operate effectively. An important component of the Single Supervisory Mechanism is the preparation of a careful, independent and harmonised evaluation of the risks contained on banks’ balance sheets. ‘Assessment of the balance sheets of euro area banks and measures to improve capital adequacy are key to the restoration of confidence,’ Governor Liikanen pointed out. Restoring the health of the banking sector and ensuring confidence in governments’ management of the public finances are also important for the transmission of monetary policy.