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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- NORDEA MARKETS ■ 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 NORDEA MARKETS ■ 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 NORDEA MARKETS