Description of the operational environment

The global economy

In 2017, the global economic climate strengthened considerably and the average growth rate of the global economy increased to approx. 3.5 per cent. The industrial countries reached a growth rate of approximately 2.5 per cent, which was reflected in a significant improvement in employment rates. The unemployment rate fell to a level approaching four per cent in the United States and was substantially below nine per cent in the euro zone. Economic growth in the developing markets was also better than anticipated. Growth in China remained stable at slightly under seven per cent, while Russia and Brazil resumed growth after a recession in the previous years. The GDP growth rate of the developing economies increased to an average of 4.5 per cent.

At the start of 2018, the outlook for the global economy remains very positive. General economic confidence in Europe is the strongest it has been in more than 17 years and, in the United States, consumer confidence has risen to a level that substantially exceeds the highs seen before the financial crisis. In the final months of 2017, macroeconomic indicators were very broadly higher than expected.

However, the global economy has now been expanding for long enough that supply-side constraints may begin to limit growth prospects in certain economic areas. In many European countries the capacity utilisation rates are already close to the peak of the economic cycle, while in the United States, unemployment has fallen below the natural rate of unemployment. President Trump’s tax cuts will likely support short-term growth in the United States, but they will also exacerbate the federal deficit, which may become a constraint on growth in the long run. In China, the debt-driven growth model based on investments is no longer working and the demand structure will inevitably need to become more balanced and based on private consumption. The structural transformation is underway, but its controlled execution involves risks. 

The most significant uncertainty in the global economy relates to the changes in the central banks’ monetary policy. In the United States, the Federal Reserve already began to slowly hike up interest rates in December 2015, but the rate of increase is now expected to pick up. In autumn 2017, the Fed also began to allow its balance sheet to contract. The European Central Bank (ECB) will halve the monthly volume of its securities purchases to EUR 30 billion starting from the beginning of 2018. This level of purchases will be maintained at least until the end of September 2018, and the ECB is expected to gradually move away from quantitative easing completely thereafter. The first interest rate hikes — if permitted by the economic climate — could be implemented in the second half of 2019. Tighter monetary policy always involves the risk that the tightening measures begin to slow down growth too much. This risk is exceptionally high at the present time because the massive stimulation measures of central banks have perhaps been the key driver of economic growth and higher asset values in the 2010s.

Interest rates have remained low and there are no significant changes expected in the near future. Long-term interest rates also increased very little in 2017 in spite of strong growth. The interest curve is still quite flat. Combined with the low basic interest rate level, this presents challenges to net interest incomes in banking. Net interest incomes are also weighed down by the liquidity regulation requirements (LCR liquidity requirements) and the ECB’s negative deposit interest rate.

The economic climate in Finland

The Finnish economy saw a stronger-than-expected upswing in growth in early 2017. The boost from the global economy was reflected in a substantial increase in exports and strong investment growth. As the year went on, the growth levelled off slightly due to a slowing down of exports.  Thanks to the growth spurt early in the year, the Finnish GDP probably grew by slightly more than 3 per cent in 2017. 

The employment rate improved surprisingly little considering the brisk GDP growth in 2017. However, this is a fairly typical phenomenon in the early stage of recovery, as businesses concentrate on making more efficient use of their existing capacity. The slower-than-expected decrease in unemployment is also attributed to a reduction in disguised unemployment: people outside the labour force are more active in seeking work. The increased supply of jobs will eventually be reflected in a higher employment rate. The decrease of unemployment will continue in 2018. 

The slight slowing down of growth seen in the second half of 2017 now appears to have been temporary, and economic development is again improving as we enter 2018 due to the hopeful outlook of the global economy. The strong growth in investments will reduce capacity constraints of the economy. The basic economic climate remains favourable with respect to consumer demand: consumer confidence is high, the employment rate is improving, interest rates are very low and purchasing power is increasing. However, household debt is starting to become a factor that constrains consumption, and the growth in private consumption may slow down slightly compared to 2017. The Finnish GDP is expected to grow by 2.5–3 per cent in 2018.