The euro area economy has continued its broad-based albeit modest recovery. Moreover, unemployment has begun to gradually recede from its high-water mark. Despite these generally favourable developments, inflation has continued to be much slower than the target. Therefore, the ECB Governing Council decided in March 2016 to lower the key interest rates and both increase and broaden the scope of securities purchases. ‘Monetary policy measures are expected to feed through into the euro area economy gradually. The measures taken will help secure a return of inflation rates towards the target, while also supporting economic growth. Recovery is expected to gather pace when the monetary policy measures still to be implemented are put into effect,’ said Bank of Finland Governor Erkki Liikanen today at the publication of the new edition of the Bank’s journal Euro & talous.
The broadly based nature of growth in the euro area has increased Finnish exports to other euro area countries. As well as supporting Finnish exports, the ECB’s accommodative monetary policy also supports domestic demand in Finland. The interest payable by households and non-financial corporations on new bank loans has continued to decline, encouraging both consumption and investment.
‘The Finnish economy is returning to growth, and investments, too, have finally begun to grow. With exports overall remaining sluggish, it is uncertain how strongly and for how long domestic demand based on growing debt can support economic growth,’ pointed out Governor Liikanen. ‘Bringing the recovery onto a sustainable footing will require Finland to both continue implementing growth-enhancing structural reforms and to restore cost-competitiveness, in which regard, agreement on the competitiveness accord is a vital step,’ Governor Liikanen continued.
Over the longer term, Finland can look forward to a much slower pace of growth than in recent decades. ‘Structural reforms, innovations and an improved operating environment for companies could improve the longer-term outlook. This would also help boost employment and support the public finances’, Governor Liikanen stressed.
The growth in private demand that has bolstered the economy is related to the continued accumulation of household debt. Rising debt ratios in a situation where the longer-term prospects for economic growth are weak justifiably give cause for concern. In managing the risks related to household debt, there is also a key role for macroprudential policy, which is used to steer the capital requirements on the banks and practices pertaining to mortgage lending. It is important to ensure that the macroprudential policy toolbox in Finland is sufficient and on a comparable level to other countries in Europe. The application of macroprudential instruments is decided on a quarterly basis by the Board of the Financial Supervisory Authority.
Forecast for the Finnish economy will be published in English by the end of June at www.bofbulletin.fi.