The outlook for the global economy has improved slightly. As a legacy of the financial crisis, however, recovery has been exceptionally slow globally and the Bank of Finland forecasts global growth of just 3.5% in 2014. The pace of growth in the United States and the emerging economies is expected to remain at present levels. The forecast risks are more on the downside, more so over the short term due to the uncertainty caused by the Crimean crisis.

In the euro area, the essential winding down of debt is weakening demand growth and employment. ‘Confidence in the financial markets and the funding conditions for banks have both improved. The ongoing comprehensive assessment will further help build confidence in the markets. It is, however, premature to say the problems have been solved,’ said Bank of Finland Governor Erkki Liikanen at today’s press briefing on publication of the latest issue of the journal Euro & talous.

A sluggish economy, a lot of slack in the economy and a contraction in credit volumes have dampened both actual and expected inflation in the euro area. With inflationary pressures only moderate, euro area monetary policy has been and can still be used to support growth and reduce the uncertainty surrounding the future direction of interest rates. In November 2013, the ECB Governing Council lowered the key policy rate to 0.25%. ‘Owing to the high degree of unutilised capacity, ECB interest rates will remain at present or lower levels for an extended period of time, supporting the economy well into the recovery. In addition, the Governing Council stands ready to take further decisive action,’ observed Governor Liikanen.

There has been progress in balancing euro area economies. In many countries, general government deficits have contracted, the private sector savings ratio has risen and competitiveness has improved. It will, however, take time to correct the substantial imbalances. ‘Placing the public finances on a credibly sustainable foundation in euro area countries is essential to secure sustainable growth and employment and ensure the stable functioning of monetary union,’ said Governor Liikanen. Both labour and capital need to be redirected into new areas. Structural change constricts economies’ ability to adapt to the new environment and places demands on the economic policies pursued.

The Finnish economy is going through its own deep structural crisis. The industrial base has contracted, the population continues to age and the outlook for the international economy is uncertain. It is important to restore general government sustainability and strengthen the foundations of economic growth in a credible way. This requires substantial structural reforms. ‘In Finland, the nature and seriousness of the economic situation is broadly understood. Essential is to have the ability to take corrective action,’ Governor Liikanen stressed. The fragility of the Russian economy – made worse by the situation in Ukraine – and the contraction in foreign trade will also weaken the Finnish economy.

Today, the Bank of Finland also published its Annual Report on 2013. In accordance with the financial statements confirmed by the Parliamentary Supervisory Council, the Bank will transfer EUR 180 million to the State. A year ago the sum transferred was EUR 227 million. ‘The Bank of Finland maintains sufficient buffers on its balance sheet to secure its operations and ensure its ability to distribute a balanced share of its profits to the State,’ Governor Liikanen stressed. ‘The need to augment the risk buffers has been reduced by the improved confidence in the financial market.’ Euro area banks have repaid refinancing received via Eurosystem monetary policy operations, a fact also reflected in the Bank of Finland’s lower interest income in 2013. Moreover, the general level of interest rates was lower than the previous year.