The ongoing recovery in the euro area economy is moderate and inflation is expected to remain low for some time. As a reaction to this, the ECB Governing Council decided in June 2014 on a combination of measures to support economic growth and enhance the transmission of monetary policy and lending to the real economy. 'We are conscious about the risks of a prolonged period of low inflation to price stability and recovery. Last week’s decisions show the ECB Governing Council's determination and capacity to act,' Bank of Finland Governor Erkki Liikanen stressed at today’s press briefing for publication of the new edition of the Bank’s journal Euro & talous.
The combination of measures included reductions in all ECB interest rates, and an offer for longer-term refinancing at a fixed rate for banks to grant new corporate loans. 'Our determination for keeping high monetary accommodation in view of the current outlook for inflation was further demonstrated by the commitment for a fixed rate tender procedure with full allotment in the regular ECB operations at least until the end of 2016,' stressed Governor Liikanen.
Finland’s GDP has now been declining for two successive years. A contraction in exports is linked to the ongoing restructuring of Finnish industry and the decline in cost-competitiveness. The prospects for growth have also been reduced by a reduction in the size of the working-age population.
According to the Bank of Finland’s new forecast, Finland’s GDP will not grow in the current year. In 2015–2016, the economy will grow by around 1.5% per annum. Output growth will predominantly be due to exports and a gradual recovery in investment. The forecast risks are weighted on the downside and relate to the recovery in the international economy and developments in Finland’s public finances and financial conditions. The employment situation will improve only marginally in the forecast period. The unemployment rate will still increase in 2014 but will come down to 7.8% in 2016. Finland’s inflation will be 1.5% in 2016, reflecting the weak economic situation and the moderate rise in wages.
Improvement in cost-competitiveness will require that costs in Finland rise more slowly than in our trading partners for several years ahead. Employment and output can also be supported by fostering arrangements at company level that enable the employees to secure their jobs and employers to ensure the profitability.
Before the onset of the international financial crisis, Finland’s public finances were in a better condition than those of many other countries. In 2008–2013, the public sector structural deficit has increased exceptionally rapidly in Finland. Achievement of general government financial targets in the immediate years ahead is, in current circumstances, uncertain.
The notable structural changes in industry have weakened the Finnish growth potential significantly in the past years. Confidence in the longer-term outlook of the economy and in economic policy has so far been maintained. However, the economy’s long-term problems, which are structural in nature, cannot be resolved through general government deficits. ‘The agreements on structural reforms and on general government consolidation measures have been vitally important. If uncertainty were to arise regarding implementation of the decisions taken, the rebuilding of confidence requires more extensive measures in the future than those currently proposed,' said Governor Liikanen.
Euro & talous 3/2014 (in Finnish)
Bank of Finland Bulletin 3/2014: Economic outlook
Slides (PDF)
Slides (PPT)