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4. DENMARK Recovery is gaining pace Economic growth is expected to increase in the coming years supported by robust private consumption and expanding investment. Employment growth is forecast to remain strong and unemployment to fall further. The general government deficit is projected to remain stable in 2017 before improving in 2018. GDP growth is strengthening Economic growth in Denmark is gradually gaining pace. Real GDP growth is estimated to have reached 1.0% in 2016 and is expected to accelerate to 1.5% in 2017 and 1.8% in 2017. Private consumption is forecast to remain the main growth driver with increasing contributions from investment. Net exports are expected to have a weakly negative impact on real GDP growth over the forecast horizon, due to higher growth in imports than in exports. 6 Graph II.4.1: Denmark - Real GDP growth and its components pps. 4 forecast 2 0 -2 -4 driver of growth, while public investment as a share of GDP is forecast to continue declining gradually. Business investment is forecast to gain pace as the maturing recovery leads to higher capacity utilisation. Housing investment is projected to have expanded at a particularly robust pace of 5.0% in 2016 supported by strongly rebounding house prices, particularly in urban areas. Although house price increases moderated somewhat over the course of 2016, housing investment is expected to further accelerate to 5.7% in 2017 and 6.7% in 2018. Following the financial crisis in 2008, public investment was increased dynamically to support the economy. In line with the government plans, public investment is expected to expand moderately in 2017 and to decline in 2018. Public investment is thus expected to decline gradually as a share of GDP, but remains significantly higher than before the crisis. -6 -8 Imports outpace exports 09 10 11 12 13 Private consumption Investment Net exports 14 15 16 17 18 Government consumption Inventories GDP (y-o-y%) Consumption remains a steady growth engine Strong employment growth, rising disposable incomes and low interest rates have stoked strong domestic demand in recent years and these factors will continue to support robust private consumption growth over the forecast horizon. Private consumption is projected to expand by around 2% annually between 2016 and 2018. The household saving rate is expected to increase slightly from already high levels, partly reflecting high pension savings. Government consumption is projected to keep expanding at a modest pace. Private growth investment is boosting economic Investment is expected to grow by 3% in 2017 and by 3.6% in 2018. Private investment is the main 66 The current-account balance reached 9.2% of GDP in 2015, one of the highest among EU countries. The current-account surplus was revised up following the revision of the national accounts in November 2016. The high surplus partly reflects an adjustment to the crisis, as business and housing investment declined and savings increased. As economic growth strengthens, corporate investment has increased and import growth is forecast to outpace export growth in the coming years. As a result, Denmark’s high surplus should gradually decline. Labour market remains strong Employment growth remains robust, reaching 1.5% in 2016. It has been driven by private sector employment, particularly in the service sector. The employment rate is expected to have increased to 77% in 2016, slightly higher than the historical average between 1995 and 2015 of 76.8%. Employment is forecast to continue growing in the Member States, Denmark coming years due to the ongoing recovery of the economy and increased labour supply due to a series of pension and labour market reforms implemented in recent years. Employment is forecast to grow faster than the labour force, reducing the unemployment rate from 6.2% in 2016 to 5.7% in 2018. Gradually rising inflation Following several years of subdued price growth, inflation is expected to pick up in 2017 and 2018. The increase in inflation reflects increasing energy prices, higher capacity utilisation and higher wage growth. HICP inflation was flat in 2016, and is forecast to increase to 1.4% in 2017 and 1.6% in 2018. Public debt to gradually decline as public finances improve The general government deficit is expected at 1.6% of GDP both in 2016 and 2017, before improving to 0.9% of GDP in 2018, based on a no-policy-change assumption. Public expenditure as per cent of GDP is expected to decrease gradually over the forecast horizon, partly due to lower expenditures on unemployment benefits and lower interest rate expenditures. Public revenues are also expected to decline from 2016 to 2018, partly due to an expected decrease in revenues from the pension yield tax, especially in 2017. Similarly to previous years, risks to the headline budget balance could come from the high volatility of certain revenue items, such as revenues from oil and gas extraction in the North Sea as well as revenues from the pension yield tax. The structural budget balance is projected to remain around -½% of GDP in 2017 and to improve to around 0% of GDP in 2018. In both years, the structural budget balance is dragged down by an expected lower level of pension yield tax revenues. The general government gross debt-to-GDP ratio is projected to continue declining from a level of 38.3% of GDP in 2016 to just below 37% in 2018. Table II.4.1: Main features of country forecast - DENMARK 2015 bn DKK GDP Private Consumption Public Consumption Gross fixed capital formation of which: equipment Exports (goods and services) Imports (goods and services) GNI (GDP deflator) Contribution to GDP growth: Annual percentage change Curr. prices % GDP 97-12 2013 2014 2015 2016 2017 2018 2027.2 100.0 1.3 0.9 1.7 1.6 1.0 1.5 1.8 955.9 47.2 1.3 0.3 0.5 1.9 1.8 1.7 2.0 520.8 25.7 1.8 -0.1 1.2 0.6 1.3 0.7 0.8 389.9 19.2 1.7 2.7 3.5 2.5 3.7 3.0 3.6 118.3 5.8 1.8 10.6 2.7 -0.5 3.2 4.1 3.4 1119.5 55.2 4.2 1.6 3.6 1.8 0.2 2.7 3.3 969.5 47.8 5.0 1.5 3.6 1.3 1.3 3.4 3.9 2095.1 103.4 1.6 1.8 2.1 1.3 0.5 1.6 1.9 1.4 0.6 1.2 1.5 1.9 1.6 1.9 0.0 0.1 0.2 -0.3 -0.4 0.0 0.0 -0.1 0.2 0.3 0.4 -0.5 -0.2 -0.1 0.3 0.0 1.0 1.3 1.5 1.0 0.9 5.3 7.0 6.6 6.2 6.2 5.9 5.7 3.3 1.6 1.5 1.5 1.9 2.2 2.7 2.2 0.6 0.8 1.1 2.4 1.8 1.7 0.0 -0.3 0.1 0.2 2.4 0.4 -0.1 5.9 8.8 5.2 10.5 11.4 12.7 12.0 2.2 0.9 0.8 0.9 0.0 1.4 1.8 2.0 0.5 0.4 0.2 0.0 1.4 1.6 0.6 1.4 1.0 1.7 3.1 -0.3 0.3 3.0 3.7 3.5 4.2 4.8 4.8 4.8 3.6 7.8 8.9 9.2 7.3 7.0 7.0 3.7 7.7 8.7 8.8 6.9 6.7 6.7 0.7 -1.0 1.4 -1.3 -1.6 -1.6 -0.9 0.0 Domestic demand Inventories Net exports Employment Unemployment rate (a) Compensation of employees / head Unit labour costs whole economy Real unit labour cost Saving rate of households (b) GDP deflator Harmonised index of consumer prices Terms of trade goods Trade balance (goods) (c) Current-account balance (c) Net lending (+) or borrowing (-) vis-a-vis ROW (c) General government balance (c) Cyclically-adjusted budget balance (d) Structural budget balance (d) General government gross debt (c) 0.2 0.6 2.5 -0.5 - -0.6 -0.6 - -0.9 -0.6 -1.9 - -0.6 -0.6 0.0 - 44.0 44.0 39.6 38.3 37.8 36.9 (a) as % of total labour force. (b) gross saving divided by adjusted gross disposable income. (c) as a % of GDP. (d) as a % of potential GDP. 67