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■ Economic Outlook Denmark
Stable recovery
 Danish economy on track
 Continued focus on productivity
 Slow normalisation of monetary policy
 Sustained growth in global economy
International overview
The general election is over, and one of the first things
the new government will have to do is to set new economic targets. But as a small, open economy Denmark
strongly depends on international trends – and here there
still seems to be some tailwinds for Denmark. The global
economy is still gaining momentum, albeit at a slightly
slower pace than anticipated in our March forecast. We
have consequently downgraded our growth forecasts for
the world economy this year from 3.4% in March to
3.2%. Growth is expected to come out at 3.8% in 2016.
This is a tad higher than our March forecast.
Notably the US and Chinese economies performed
weaker than expected during the first quarters of the year.
The Euro area surprised on the upside partly due to a
strong cocktail of an ultra-accommodative monetary policy line, currency depreciation and low oil prices.
And we are in fact not all that worried about the situation
in the US. The reason is that US growth has been curtailed by temporary factors such as an unusually hard
winter and port strikes. China, on the other hand, seems
to be facing major cyclical and structural challenges.
However, it should always be borne in mind that the authorities of the Middle Kingdom traditionally ease economic policy sufficiently to maintain the centrally fixed
growth targets.
While the oil price seems to have bottomed out, a long
period of very low monetary policy rates in the Euro area
is a likely scenario. The ECB is not expected to hike rates
until after the QE programme has been phased out, which
will happen in September 2016 if everything goes according to plan. And as the US Federal Reserve is anticipated to embark on its tightening cycle one year earlier,
the euro will, we think, depreciate further in the years to
come.
2015 was the year when the use of unconventional monetary policy weapons gained a hold in Europe. This was
the case in the Nordic countries, too, where Denmark and
Sweden introduced different kinds of QE programmes
and negative interest rates.
In general, the Nordic countries are doing relatively well.
Sweden can in fact boast one of the highest growth rates
in Europe, and Norway should emerge from the marked
decline in oil prices unscathed. Finland is still the Nordic
1 ECONOMIC OUTLOOK │DECEMBER 2013
country facing the biggest challenges these years and will
not record growth again until next year.
Danish economy: growth foundation strong enough?
After seven consecutive quarters of positive growth, sentiment surrounding the Danish economy has in earnest
turned bullish. We, too, believe that the economy has entered a stable recovery phase. That means a period where
growth rates of around 2% will drive the economy back
towards full employment. Compared to our March forecast, we have revised up our growth estimate for this year
to 1.75% (versus previously 1.5%) with growth for 2016
at 2.0% versus 1.9% previously.
Need for reforms to lift productivity
With the prospect of a longer period of growth above the
long-term potential (estimated around 1%), idle capacity
will gradually shrink. And when this will result in capacity problems is very uncertain at this stage. Since
mid-2011 productivity has not grown and economic
growth over the past 18 months is therefore ascribable to
a relatively sharp rise in employment.
There are still no signs of more general mismatch problems in the Danish labour market. But in the slightly
longer perspective, it is absolutely necessary to boost
productivity to avoid bottleneck problems in the labour
market and lift the potential growth rate. Alternatively,
the economic foundation could quickly prove too weak to
provide a sustainable recovery.
Low investment activity boosts current account
The challenge involved in boosting productivity is reflected in business investment levels. Since 2009 business net investment has been negative, implying that the
capital stock is becoming worn out. And that does not
exactly stimulate productivity.
But the low investment levels provide the basis for a very
significant savings surplus in non-financial companies.
This, combined with large current income from Denmark’s net wealth relative to other countries, helps ensure a historically large current account surplus. If the
business activity level is strengthened, it will in all probability lead to a decline in the current account surplus in
the years to come – a decline that from a long-term stability perspective would be good news for the Danish
economy.
Consumer spending weakness ending
Over the past six months the weakness in Danish consumer spending seen in the past four years has ended.
The gains have mainly been driven by growth in spending on services, which is now back at the 2008 level. In
recent quarters the consumption of goods has also grown.
However, this chiefly masks a normalisation of the con-
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■ Economic Outlook Denmark
sumption of electricity and district heating, whereas retail
sales have stagnated again. Looking ahead, we expect
household consumption to continue the upward trend –
driven by increased purchasing power, a high level of
consumer confidence, large financial savings and a supportive trend in the housing market.
Prospect of higher economic growth in Denmark
Good conditions for exports
Exports of goods have had a strong start to 2015. This
progress has chiefly been concentrated around the traditionally large groups of goods such as machinery and
pharmaceutical products. Especially exports of goods to
the US have seen strong growth, and the US is now
Denmark’s third-largest export market. One reason is the
dollar appreciation – an effect we expect to provide additional tailwind for Danish exports in the period ahead.
Meanwhile, the improved growth outlook for the Euro
area will benefit Danish exports strongly. Notably continued progress in the vital German market is set to provide a solid lift to Danish exports.
Private net investment remains negative
Government balance without support
The challenges of ensuring a sustainable economic recovery particularly applies to the government balance.
For outsiders the government balance looks like a true
success story. In 2014 public finances recorded a surplus
of nearly DKK 35bn – the first since 2008. Adjusted for
temporary revenues from the changed taxation of capital
pension schemes, public finances showed a deficit of
DKK 28bn.
Household consumption accelerating again
In addition to these one-off pension revenues, the government has over the past few years benefited from revenues from taxation of pension returns. Given a normalisation of these revenues in the coming years, the new
government’s scope for expansionary fiscal policy
measures is very limited. It would therefore be advisable
to gradually embark on fiscal policy tightening if the
economy continues on the current path. In our forecast
we have assumed that government consumption will
grow by 0.3% in 2016 under the new centre-right government.
Housing market – catalyst or risk factor?
Prices in the Danish housing market are once again rising
sharply. Based on the latest monthly figures, prices of
both single-family houses and owner-occupied flats have
increased by around 10% in recent years. These price increases occur at a time when selling times are dropping,
turnover is accelerating and average price reductions are
gradually declining. There are also growing signs that
this trend is spreading from the large cities and becoming
more broadly based. We believe that the current housing
market gains are driven by a combination of cheap financing opportunities, higher employment and an overall
positive economic outlook by households.
2 ECONOMIC OUTLOOK │DECEMBER 2013
Home prices heading higher
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■ Economic Outlook Denmark
Even so, new private construction has not started to grow
yet, and fixed residential investment is still not making a
positive contribution to overall economic growth. We
expect the combination of very low financing costs and
continued price increases in the existing housing market
to trigger an acceleration in new construction over the
forecast horizon. Together with more large-scale renovations, this will provide a much-needed lift to fixed residential investment and employment in the construction
trades.
central bank will want to reduce currency reserves further
in the current situation, before taking the next steps in the
normalisation process. We also expect the central bank to
resume government bond issuance but not until later this
year, and this step will be followed by an independent
Danish rate hike during the fourth quarter.
Inflation gradually moving higher
Jan Størup Nielsen
Inflation reached a temporary bottom of -0.1% in January. Consumer prices have subsequently increased gradually, in part driven by higher food and transport prices
as well as higher prices within leisure and culture. We
expect inflation to continue the upward trend towards
year-end, reaching some 1.0% at the beginning of 2016.
Over the autumn, mainly the elimination of the base effects of the rapid oil price decline will help push inflation
higher. This effect will also be strengthened by upward
pressure on import prices as a result of the weaker krone
exchange rate.
Helge J. Pedersen
[email protected]
+45 333 3126
[email protected]
+45 333 3171
With the improved outlook for the labour market, wages
will continue to outpace consumer prices. Wage earners
will consequently be able to maintain an increase in purchasing power, and this is a crucial prerequisite for the
expected growth in household consumption.
Long, tough haul by central bank
After a hectic start to the year, the Danish central bank
has slowly but surely embarked on the path of normalisation of monetary policy. The first part of this process is a
reduction of the currency reserves, which have dropped
by more than DKK 90bn over the past two months.
However, this drop should be viewed in light of the increase in currency reserves by DKK 275bn during the
unstable period at the start of the year. We think the
Denmark: Macroeconomic indicators (% annual real changes unless otherwise noted)
2012
0,4
-0,2
0,6
9,8
-8,2
1,2
-0,6
0,1
0,9
-0,7
1.867
2013
0,0
-0,5
1,0
0,3
-5,0
3,4
-0,2
0,8
1,5
-0,5
1.886
2014
0,5
1,4
3,7
8,6
6,5
1,1
0,3
2,6
3,8
1,1
1.919
2015E
1,9
0,8
0,4
-2,0
-1,4
2,0
0,0
3,2
2,6
1,7
1.990
2016E
2,1
0,3
2,8
-3,0
3,7
4,5
0,0
3,9
3,8
2,0
2.057
Unemployment rate, %
Gross unemployment level, '000 persons
Consumer prices, % y/y
Hourly earnings, % y/y
Nominal house prices, one-family, % y/y
Current account balance (DKKbn)
- % of GDP
6,1
162
2,4
1,6
-3,3
105
5,6
5,8
153
0,8
1,2
2,7
136
7,2
5,1
134
0,6
1,3
3,4
121
6,3
4,7
125
0,6
1,5
3,2
110
5,5
4,5
118
1,7
2,0
3,9
105
5,1
General government budget balance (DKKbn)
- % of GDP
General government gross debt, % of GDP
-68
-3,7
44,4
-20
-1,1
43,7
24
1,2
45,2
-25
-1,2
39,1
-40
-1,9
40,1
Private consumption
Government consumption
Fixed investment
- government investment
- residential investment
- business investment
Stockbuilding*
Exports
Imports
GDP
Nominal GDP (DKKbn)
2011 (DKKbn)
872
491
336
40
80
216
18
971
869
1.833
* Contribution to GDP growth (% points)
3 ECONOMIC OUTLOOK │DECEMBER 2013
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