Monetary policy and the global economy Bank of Finland Bulletin 4/2016 Samu Kurri, Bank of Finland

1. Unrestricted
Bank of Finland
Growth overshadowed by
hard-to-quantify risks
Monetary policy and the global economy
Bank of Finland Bulletin 4/2016
129.9.2016
Samu Kurri

2. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Themes of the presentation
 Global growth forecast little changed
– Growth will barely accelerate in the immediate years ahead
– Effects of Brexit hard to assess at this point
 Inflation remains very subdued
– Oil price effect to subside in early 2017
– Difference between markets’ and economists’ inflation expectations a
source of concern
 Risks to growth mainly on the downside
– Some risks relate to economic factors that can be estimated by
economics tools
– Some risks are difficult to assess in economic terms
29.9.2016 Samu Kurri 2

3. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Current situation and outlook for the real
economy
29.9.2016 Samu Kurri 3

4. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Moderate global growth in early 2016
29.9.2016 Samu Kurri 4
-10
-5
0
5
10
15
2008 2010 2012 2014 2016
GDP, % change on previous year
Sources: National statistical authorities and Macrobond.
32427
China
United States
Euro area
United Kingdom
Japan

5. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Stock exchanges do not signal any
major improvement in growth …
29.9.2016 Samu Kurri 5
80
90
100
110
120
130
140
150
160
170
2015 2016
China Euro area United States
Japan Russia United Kingdom
Share price index, 100 = 1 Jan 2015
Source: Macrobond.
32427

6. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
… and neither do the soft statistics
29.9.2016 Samu Kurri 6
40
45
50
55
60
65
2015 2016
United States Euro area United Kingdom
China Japan Russia
Index
Source: Macrobond.
32427
PMI, composite

7. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Economists revised down 2017 growth
forecasts, notably for the UK
7Samu Kurri29.9.2016
0
1
2
3
4
5
6
7
2016
GDP forecasts for 2017, % change on previous year
Consensus forecasts collected on the 7th–13th of each month.
Sources: Consensus Economics (US, euro area and UK) and the IMF.
23060
United Kingdom
Euro area
World
United States
China

8. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Estimates of the effects of Brexit surrounded
by great uncertainty:
notably for the UK economy …
29.9.2016 Samu Kurri 8
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 12/16
Consensus: UK
Monthly GDP forecasts for 2017, annual growth
Source: Consensus Economics.
23060@Chart10UK
United Kingdom

9. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Estimates of the effects of Brexit surrounded
by major uncertainty:
… but also for the euro area
29.9.2016 Samu Kurri 9
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
3
01/16 02/16 03/16 04/16 05/16 06/16 07/16 08/16 09/16 10/16 11/16 12/16
Consensus: Euro area
Monthly GDP forecasts for 2017, annual growth
Source: Consensus Economics.
23060@Chart10EA
Euro area

10. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Inflation picture and underlying factors
29.9.2016 Samu Kurri 10

11. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Inflation in main economic regions
remains subdued
29.9.2016 Samu Kurri 11
-4
-2
0
2
4
6
8
10
2008 2010 2012 2014 2016
Consumer price index, % change on previous year
Sources: Eurostat, national statistical authorities, OECD and Macrobond.
32427
China
United States
United Kingdom
Euro area
Japan

12. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Inflation, GDP and monetary policy
 Key factors underlying inflation developments
– Inflation expectations
– Actual inflation
– Output gap, or the difference between actual output and output
at full capacity
– Price of crude oil
 Monetary policy works through
– Anchoring of inflation expectations
– Real economic developments.
29.9.2016 Samu Kurri 12

13. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Oil price an important one-off factor
behind drop in inflation
29.9.2016 Samu Kurri 13
0
20
40
60
80
100
120
140
2014 2015 2016 2017 2018 2019 2020
USD/barrel
The Bank of Finland forecast assumption is the 10-day average of futures prices on 15
September 2016.
Source: Macrobond.
23060@FutuuritUusin
Oil price and futures prices forecast
Futures
30 Jun 2014
Futures
15 Sep 2016
Futures
20 Jan 2016

14. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Sliding oil price not expected to influence longer-
term inflation expectations
29.9.2016 Samu Kurri 14
0
0.4
0.8
1.2
1.6
2
2.4
0
0.4
0.8
1.2
1.6
2
2.4
2013 2014 2015 2016
Difference in expectations (right-hand scale)
Long-term inflation expectations according to SPF survey
Market expectations, 1 year 4 years ahead
% % points
Sources: ECB, Macrobond and Bank of Finland.
27227@Chart27(3)
Gulf between inflation expectations of markets and
professional forecasters has grown

15. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Euro area core inflation subdued …
29.9.2016 Samu Kurri 15
-5
-4
-3
-2
-1
0
1
2
3
4
2008 2010 2012 2014 2016
Core inflation
Core inflation, %
Sources: Eurostat, European Commission, OECD, IMF and calculations by the
Bank of Finland.
23060

16. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
… as the output gap remains significant
29.9.2016 Samu Kurri 16
-5
-4
-3
-2
-1
0
1
2
3
4
-5
-4
-3
-2
-1
0
1
2
3
4
2008 2010 2012 2014 2016
Core inflation Output gap
Core inflation, % Output gap, % points
The shaded area delineates the range between the minimum and maximum output gap assessment.
Sources: Eurostat, European Commission, OECD, IMF and calculations by the Bank of
Finland.
23060@EA_CoreCPI_GAP

17. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Bank of Finland forecast for the global
economy
29.9.2016 Samu Kurri 17

18. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Forecast for the global economy little
changed
29.9.2016 Samu Kurri 18
% change on previous year
(previous forecast)
GDP 2015 2016f 2017f 2018f
EU22 2.0 (1.7) 1.7 (1.6) 1.3 (1.8) 1.6 (1.8)
United States 2.6 (2.4) 1.6 (2.2) 2.3 (2.3) 2.2 (2.2)
Japan 0.6 (0.5) 0.4 (0.4) 0.9 (0.7) 1.0 (1.2)
China 6.9 (6.9) 6.5 (6) 6 (6) 5 (5)
Russia -3.7(-3.7) -1 (-3) 1 (0) 1.5 (1)
World 2.9 (2.8) 2.8 (2.8) 3.1 (3.2) 3.1 (3.2)
World trade 2.3 (1.4) 1.5 (2.7) 3.2 (3.8) 3.5 (4.0)
f = forecast
E22 = euro area, the UK, Sweden and Denmark.

19. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Oil price change broadly reflected in the
inflation outlook
29.9.2016 Samu Kurri 19
% change on previous year
(previous forecast)
Inflation 2015 2016f 2017f 2018f
EU22 0.0 (0) 0.4 (0.2) 1.4 (1.4) 1.5 (1.6)
United States 0.1 (0.1) 1.1 (1.0) 2.1 (2.3) 2.2 (2.2)
Japan 0.8 (0.8) -0.1(0.2) 0.6 (1.5) 1.0 (1.4)
f = forecast
E22 = euro area, the UK, Sweden and Denmark

20. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Forecast risks
 Risks external to the euro area
– Step-up in US productivity growth (+)
– Protectionism, introversion (-)
– Financial market disruption in China (-)
 Risks internal to the euro area
– Effects of Brexit (-)
– Political uncertainty (in Italy), banking system
in Italy (+/-)
29.9.2016 Samu Kurri 20

21. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Many unresolved issues remain in
assessment of Brexit effects
 What does Brexit mean?
– Resignation likely to be triggered in early 2017
– No information on negotiation objectives, negotiations likely to go on
beyond the end of 2018
 Bank of Finland’s forecast mainly takes account of the
trade effects of Brexit
– UK growth forecasts surrounded by uncertainty
– Assumptions of contagion effects marked by uncertainty
 Bank of Finland forecast does not take account of the
– Effects on the mobility of labour, on investment and productivity
– Effects on the EU’s future internal dynamics
29.9.2016 Samu Kurri 21

22. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Chinese debt surging in all sectors
29.9.2016 Samu Kurri 22
0
50
100
150
200
250
300
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Corporate debt Household debt
Public debt Total debt
% of GDP
Source: BIS.

23. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Protectionism and turning inwards
 World trade already sluggish for many years
– Partly due to the prolonged recession
 Protectionism back in the headlines
– International trade boosts size of cake
– Cake nevertheless unevenly divided
 Political processes hard to assess
– Brexit, free-trade negotiations, …
– Uncertainty surrounding both probabilities and impacts
29.9.2016 Samu Kurri 23

24. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Globalisation and ICT boosted US
productivity growth in 1995–2005
29.9.2016 Samu Kurri 24
-1
0
1
2
3
4
5
6
7
1987 1992 1997 2002 2007 2012
%, annual growth in labour productivity
Source: BLS.
32428
1987-1994
1995-2004
2005-

25. Suomen Pankki – Finlands Bank – Bank of Finland Unrestricted
Thank you!
29.9.2016 Samu Kurri 25