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"Monetary Review - 1st Quarter 2000"

 

Recent Monetary Trends

This review covers the period from November 1999 to the middle of February 2000

INTERNATIONAL ECONOMIC BACKGROUND

The general position of the US economy has not changed in any significant respect in recent months. In the 4th quarter the annualised rate of growth in the US economy was 5.8 per cent higher than in the preceding quarter. Despite a higher level of interest rates, cf. Chart 1, there are no signs of any slowdown in private consumption. The households' savings ratio decreased significantly during the boom, since consumption rose faster than disposable incomes. Together with a higher volume of investments this resulted in an increase in the current-account deficit to just under 4 per cent of GDP in 1999. A significant source of financing was non-residents' purchases of US stocks, leading to a more global distribution of the associated potential gains and risks.

Chart 1 LONG-TERM YIELDS AND SHORT-TERM INTEREST RATES IN THE USA
AND THE EURO AREA

During the last year inflation has risen by 1 per cent to a year-on-year rate of 2.7 per cent in December. This is related primarily to rising energy prices. Underlying inflation is still surprisingly low, in view of the cyclical position. The rate of wage increases is rising, but at 3.5 per cent in January was still moderate considering the low level of unemployment.

On 16 November and 3 February the Federal Reserve raised its leading interest rate, the fed funds target rate, by 0.25 per cent in each case to 5.75 per cent. The interest rate has thus been raised by 1.0 per cent over the last year, which has more than redressed the interest-rate reductions at the end of 1998. From the summer to the beginning of November long-term US bond yields were approximately 6 per cent, but have since risen to around 6.6 per cent in the middle of February.

After the dollar's strengthening during the 1st half of 1999 no trend was shown by the doller/euro exchange rate during the following 6 months, when the exchange rate fluctuated at a level slightly above par. The dollar strengthened at the end of January, pushing the euro below par, which attracted considerable attention. After strengthening during the 2nd half of 1999 the Japanese yen weakened against the US dollar at the beginning of 2000.

The surprising feature of the US economy throughout the 1990s has been the high growth rate without any actual inflationary pressure. In recent years this can be attributed to such factors as a considerable increase in productivity, which again has been attributed to huge investments in IT technology. However, a characteristic feature of the 1990s taken as one is that the development in productivity in the USA was no stronger than in the EU and Denmark. Table 1 shows a breakdown of growth on the three explanatory factors: population growth, participation rate and development in productivity, cf. the Box. It appears that a considerable proportion of the growth in the USA can be attributed to a relatively strong increase in the active age classes of the population throughout the 1990s. At the same time, there was a significant increase in the proportion of the population in employment. This corresponds to the drop in the unemployment rate. On the other hand, in the first part of the decade the development in productivity was low. This perhaps explains how productivity could be increased significantly in recent years, even though normally productivity tends to decline towards the end of a boom. In Denmark productivity increased at the beginning of the upswing, i.e. from 1993 to 1995, while in the last 5 years the rate of increase has been low. EU productivity exceeded the US level in the first half of the 1990s, but with less job creation, so that growth was virtually without any creation of new jobs.

Table 1 BREAKDOWN OF GROWTH FOR USA, eu AND DENMARK, 1990-99

Rate of growth, per cent p.a.	USA	EU	Denmark
Population aged 15-64 years	0.9	0.3	0.3
Participation rate	0.4	-0.1	0.1
Productivity	1.8	1.7	2.1
1990-95	1.4	2.0	3.1
1995-99	2.3	1.3	0.9
Growth, total	3.1	1.9	2.5

Note : Annual rate of growth from first year to final year.

Box BREAKDOWN OF ECONOMIC GROWTH

During the last six months the cyclical outlook for the euro area has improved. The national accounts for the 3rd quarter showed an annualised growth rate of more than 4 per cent compared to the 2nd quarter. The improvement was broad-based since it was supported by both domestic demand and external trade. The growth pattern varies considerably within the euro area, but it is characteristic that the upswing was sluggish in the largest member state, Germany, while several of the smaller euro area member states saw stronger growth. This brought a considerable decline in unemployment in the euro area to 9.6 per cent in December. The consumer and business surveys for the 4th quarter indicate greater optimism, cf. Chart 2.

Chart 2 CONFIDENCE INDICATORS FOR THE EURO AREA

Despite a higher rate of increase attributable to energy prices inflation in the euro area is moderate, with growth in HICP for the 11 member states of 1.7 per cent in December. Excluding energy and foodstuffs the increase was as low as approximately 1 per cent, which was its level for the past year. The course taken by energy prices implies stronger growth in the first months of this year. In several euro area member states, including Ireland and Spain, inflation is already clearly above the upper limit of 2 per cent p.a. in the ECB's definition of price stability.

No euro area member state exceeds the general government budget deficit criterion of 3 per cent of GDP. Most member states' deficits are in the range of 1-2 per cent of GDP. Ireland and Finland have significant budget surpluses, due to their strong cyclical positions.

On 3 February the European Central Bank (ECB) raised its interest rates by 0.25 per cent. The rate of interest for main refinancing operations thus reached 3.25 per cent. The background to the decision was an assessment of the inflation risk in the medium term. Prior to the interest rate increase the rate of growth in the money stock and in credit expansion had indicated continued ample liquidity. At the same time growth in prices and costs was stronger and more sustained than anticipated. The weakening of the effective euro rate contributed to the rising inflation, not only in terms of upward pressure on commodity prices in national currencies, but also with regard to import prices in general, with the risk of a consequential impact on wage and price formation accentuated by the improved cyclical prospects.

On 5 January the ECB carried out an extraordinary liquidity-absorbing market operation with settlement on 12 January, the date of the first main refinancing operation after the turn of the year. The purpose of the extraordinary market operation was to absorb a proportion of the extra liquidity which had been supplied around the turn of the year, cf. the section on the turn of the year 1999/2000. The extraordinary liquidity expansion at the beginning of the year was also attributable to a number of other factors. Liquidity totalling euro 14 billion was absorbed within the stipulated maximum interest rate of 3 per cent. It was the first market operation of this kind in the lifetime of the euro.

Since mid-November Germany's 10-year government bond yield has been increasing in line with the US bond yield, and reached 5.6 per cent in mid-February. The slope of the German yield curve is steeper than the US curve, cf. Chart 1. The market interest rates thus reflect expectations of rising short-term euro interest rates.

Growth in the first quarters of 1999 indicated that Japan was finally on its way out of the recession, but negative growth in the 3rd quarter showed that this progress is still faltering. Domestic demand, including private consumption, was particularly disappointing. Exports, on the other hand, took a more favourable course, even though the Japanese yen has appreciated by more than 10 per cent against the euro and the dollar over the past year, leading to a decrease in competitiveness. Short-term and long-term interest rates are very low, which rules out stimulating the economy further by further reduction of interest rates. Fiscal policy has so far also proved unable to give the economy a decisive boost, despite repeated packages of measures to stimulate the economy which together with the weak cyclical position led to a budget deficit of more than 7 per cent of GDP in 1999.

After slowing down to a degree at the beginning of 1999 most UK indicators point to renewed growth. In contrast to the preceding quarters growth in the 3rd and 4th quarters was also driven by net exports, whereas previously the economy had been buoyed up solely by domestic demand.

The pound sterling has strengthened by approximately 5 per cent against the euro over the last half-year. As an element of its very active monetary policy the Bank of England raised the interest rate on several occasions during the last 6 months. These interest-rate increases must be viewed against the background of high capacity utilisation in the British economy in a period of accelerating activity. The UK's monetary policy is managed according to an inflation target set by the government at 2.5 per cent in the RPIX index, i.e. the consumer-price index excluding housing. Inflation is currently slightly below this target, and the Bank of England does not expect it to rise until well into 2000.

The Swedish economy is undergoing an upswing borne up by private consumption and exports. Inflation has risen, but is still low. Underlying inflation, which is of significance to Sveriges Riksbank's planning of monetary policy, is around 1.5 per cent, but is expected to rise. Against this background, with effect from 9 February Sveriges Riksbank raised the repo rate by 0.5 per cent to 3.75 per cent. The Swedish krona appreciated against the euro throughout 1999 and into 2000, to a level equivalent to kr. 0.87-0.88 per krona in mid-February 2000.

Norway experienced a short period of low growth, and Norges Bank lowered its leading interest rate significantly throughout 1999. However, the downturn in the economy can soon be reversed by the upswing in oil prices.

With effect from 17 January the Greek drachma was revalued by 3.5 per cent against the euro. The new central rate is GRD 340.75 per euro, while the fluctuation band is unchanged at +/- 15 per cent around the central rate. The market rate was not affected by the revaluation, cf. Chart 3. The revaluation has no impact on the ERM II agreement for Denmark.

Chart 3 GREEK DRACHMA VIS-À-VIS EURO AND FLUCTUATION BAND IN erm II

For a prolonged period the Greek drachma has been stronger than its central rate within ERM II in order to support the downward convergence of the rate of inflation in Greece towards the EU average. Up to the revaluation in January 2000 the drachma was almost 7 per cent above its central rate. The adoption of the euro at the previous central rate would thus impose a significant inflation risk on the Greek economy at a time of already high growth.

The prospects for the Greek economy have improved significantly in recent years with convergence in almost all areas towards the rest of the EU. Greece has announced its intention to apply in March for EMU membership with effect from 1 January 2001. An important barrier was removed in November when the ECOFIN Council decided to lift its previous decision that an excessive budget deficit existed in Greece. In 1999 the budget deficit was less than 2 per cent of GDP, and is expected to decline further in the coming years.

Convergence has also been achieved in respect of inflation and interest rates, so that Greece can be realistically expected to meet these criteria in the convergence assessment in the spring of 2000.

DEVELOPMENT IN INTEREST AND EXCHANGE RATES IN DENMARK

Against the background of the ECB's raising of interest rates Danmarks Nationalbank with effect from 4 February raised the discount rate and the current-account rate by 0.25 per cent to 3.25 per cent. The lending rate and the rate of interest for certificates of deposit were raised by 0.30 per cent to 3.60 per cent. This was the first adjustment of interest rates since they were raised at the beginning of November.

The 3-month money-market interest rate rose by just over 0.5 per cent during the month up to the raising of interest rates in November, and fluctuated at around 3.7 per cent until the beginning of February, after which it rose with the official interest rates. The differential vis-à-vis the euro interest rate narrowed slightly to 35 basis points in mid-February.

The Danish 10-year government-bond yield has followed the trend on the international markets and increased in recent months to around 5.9 per cent in mid-February. The yield differential to Germany narrowed slightly to 35 basis points in mid-February, which is close to its historical low.

The average spread between government-bond and mortgage-credit bond yields has been stable during the last 6 months. The slope of the yield curve continues to be rather steep. This has resulted in higher demand for adjustable-rate mortgage loans which are subject to full or partial adjustment of the interest rate for every year of the maturity of the loan. These loans are an alternative to the usual long-term fixed-rate mortgage-credit loans. Adjustable-rate mortgage loans now constitute a considerable proportion of new lending. However, adjustable-rate loans are still only approximately 6 per cent of total outstanding loans.

The krone is still slightly stronger than its central rate in ERM II. Towards the end of 1999 and in the first part of January there was an underlying tendency for the krone to weaken. As a countermeasure, in January the Nationalbank intervened for just over kr. 12 billion in order to dampen the fluctuations in the krone/euro exchange rate, which has been stable at around kr. 7.44 per euro. The currencies of a number of Denmark's largest trading partners have strengthened against the krone and in mid-February the effective krone rate was at its lowest level since 1993.

TURN OF THE YEAR 1999/2000

The transition to 2000 was smooth and the much-feared computer-related problems did not occur in either Denmark or abroad. Concern about Y2K problems had given rise to extra high risk premiums on money-market transactions expiring immediately after the turn of the year. Up to the turn of the year both the ECB and the Federal Reserve supplied liquidity to the market as an extraordinary measure. Danmarks Nationalbank had given extraordinary access to both purchase and sale of certificates of deposit in order to prevent liquidity problems and excessive interest-rate fluctuations. Furthermore, the participants in the Danish money market had agreed beforehand to set the value date for transactions concluded just after New Year at 10 January. Since all systems operated satisfactorily, however, on 4 January it was already possible to revert to the usual practice of setting the value date as the following trading day.

The uncertainty up to the turn of the year was also apparent in the bond market. Non-residents' interest in Danish bonds was considerable from the end of 1998 up to the last months of 1999. Then the pattern reversed, however, to considerable resales in connection with large drawings of central-government securities. This is normal for the end of the year, but the year 2000 problem may have reduced the reinvestment volume. Stocks were not affected to the same degree, just as resident investors were less cautious and displayed a great interest in foreign securities up to and after the turn of the year.

DOMESTIC ACTIVITY AND THE BALANCE OF PAYMENTS

The growth in the Danish economy shifted to a lower gear in 1999. The underlying factor is reduced domestic demand, while growth on export markets improved. The dampening reduced the pressure on capacity, and the Danish economy is therefore apparently preparing for a soft landing after a number of years of strong growth and a significant increase in real wages. As there is a surplus on both general-government finances and the balance of payments the picture of a well-balanced economy is spoiled first and foremost by the rate of inflation.

The preliminary national accounts for the 3rd quarter of 1999 showed growth in the gross domestic product (GDP) of 0.8 per cent against the previous quarter, and a year-on-year growth rate of 1.0 per cent. The growth in relation to the 2nd quarter was driven by domestic demand, including private consumption, which fell in the two preceding quarters. Despite the downward pressure from the Whitsun package of economic measures and rising long-term interest rates the growth in private consumption has by no means come to a halt. Government consumption also rose in the 3rd quarter.

The increase in employment has stopped. After a surprisingly strong increase in seasonally-adjusted ATP-registered (Labour Market Supplementary Pension Scheme) employment in the 3rd quarter, the statistics showed an even stronger decline in the 4th quarter of 1999. Since unemployment continued to fall up to the end of the year, the decline in employment in the 4th quarter may be due to a statistical aberration.

After years of continued increase almost without interruption, house prices fell by just over 3 per cent in the 4th quarter of 1999 against the 3rd quarter, according to the statistics for the average price per square metre compiled by the Association of Danish Mortgage Banks. Turnover also declined significantly in the 4th quarter. The dampening of house prices was expected in view of the reduction of the tax deductibility of interest payments under the Whitsun package of economic measures and the rising long-term interest rates. It must be noted that particularly in the 3rd quarter a relatively large number of houses were traded in the Greater Copenhagen area, where prices per square metre are higher than in the rest of Denmark. The underlying price trend was therefore weaker than the figures indicate. Taking this into account, according to the statistics of the Association of Danish Mortgage Banks the prices already subsided in the 3rd quarter. The official house price statistics from Statistics Denmark avoid such composite effects by measuring house prices relative to their public property valuation. As yet these statistics are only available for up to the 3rd quarter, when prices were almost 6 per cent higher than one year before. If a house purchase is financed with an adjustable-rate loan the instalment for the first year is reduced by up to one fourth in the present interest-rate conditions, compared to the usual financing with long-term fixed-rate loans. This may have contributed to sustaining the level of house prices.

Towards the end of 1999 domestic lending by the banks, especially lending to households, weakened against the preceding period. Growth in lending by mortgage-credit institutes also dampened.

Retail sales were stable from January to October, but rose in the last months of year, while the consumer-confidence indicator was slightly negative around the turn of the year, and car sales declined towards the end of the year and in the beginning of January, although tax-related factors pushed up sales in December. The higher influx of orders to the manufacturing industry can be attributed primarily to export markets, and to a lesser degree to the domestic market, considering the 4th quarter as one. The number of square metres of work in progress indicates receding building and construction investments, although this pattern was modified somewhat by the violent storm at the beginning of December and the subsequent repair of the storm damage.

Against the background of the Finance Act for 2000 fiscal policy appears to be slightly more expansionary than originally planned. However, together with the effects of the Whitsun package the outlook is still that fiscal policy for 2000 will have a slightly dampening effect on the economy, provided that the agreements concluded with regional and local governments are observed.

Preliminary current-account statistics showed a surplus of just over kr. 11 billion for the period from January to November 1999, compared to a deficit of kr. 9.8 billion in the same period of 1998. The development is attributable mainly to improvement of the trade balance, but also to a more favourable balance of services and net interest and dividend to abroad.

Imports have stagnated in step with the dampening of domestic demand. This applies both to imports for consumption and imports for the business sector.

During the entire upswing from 1993 to 1998 Denmark lost shares on export markets ^[1]. It should be taken into account that the initial level was high, due to the expansion in the wake of German reunification at the beginning of the 1990s. Most recently the loss of market shares has ceased. In particular, the performance of manufactured exports was better in 1999 than in the previous year, cf. Chart 4, and the influx of orders indicates that the favourable course can be sustained in the coming months. The domestic market's dampening and the initial upswing in the euro area enhance business enterprises' interest in the export markets. There is little prospect of any significant expansion of market shares in view of the relatively strong development in Danish wages in recent years.

Chart 4 DEVELOPMENT IN MARKET SHARES AND RELATIVE EXPORTS

Note :

The strong drop in the 2nd quarter of 1998 is attributable to the large-scale industrial conflict on the labour market.

COMPARISON OF EXTERNAL TRADE AND PAYMENTS STATISTICS

Throughout most of 1999 there was good accordance between the current account of the balance of payments and the balance of external payments in the payments statistics ^[2], cf. Chart 5.

Chart 5 CURRENT EXTERNAL PAYMENTS AND CURRENT ACCOUNT OF THE BALANCE OF PAYMENTS

Note : Accumulated over 12 months.

This accordance in 1999 is in marked contrast to the considerable divergence between the two statistical compilations in 1998. Since the divergence also contributed to uncertainty of whether there was an external surplus or deficit in 1998, at the request of the Ministry of Economic Affairs, in the summer of 1999 Statistics Denmark and the Nationalbank embarked on a comparative survey designed to reveal the reasons for the divergence between the compilations with regard to trade in goods. This had become possible after the Nationalbank in October 1998 introduced a new reporting system ^[3] for the compilation of external payments.

The survey is not yet completed. The work so far solely comprises a comparison of reported flows of goods and payments for the external trade statistics and the payments statistics from a small selection of companies for the period March-May 1999. In view of the so far limited scope of the survey and the fact that analysis of the data reported for the two statistical compilations from the relevant business enterprises has not yet been completed, it is still too early to state definitively whether the differences between the two compilations are due to actual reporting errors or diverging compilation principles where e.g. differing accrual principles play a key role.

The preliminary results ^[4] in particular show a certain tendency for over-reporting of both export and import payments in the Nationalbank's payments statistics – after the introduction of the new reporting system – which can be attributed primarily to reporting errors concerning payments for goods which do not cross Denmark's borders. Since in principle the over-reporting will have an equivalent impact on the export and import sides, it will not ultimately affect the balance of current external payments in the payments statistics.

During the spring of 2000 the survey will be expanded to involve additional business enterprises, and will be extended to include other comparison periods.

Notwithstanding the final result of the survey it is important to em.phasise that current payments in the Nationalbank's payments statistics will still diverge from Statistics Denmark's compilation of the current account in terms of compilation method as well as accrual principle. The two compilations will therefore still show diverging balances in the future.

The reason for the extraordinary large discrepancy in 1998 is not likely to be found. The survey is nevertheless a good starting point for improving the reporting systems and thereby the quality of the statistics, should system-related errors emerge during the work. The aforementioned over-reporting of goods payments in the payments statistics must be regarded as initial difficulties in connection with the new reporting system. The Nationalbank will seek to solve the problem by providing guidelines to the reporting business enterprises and on an ongoing basis will combat any other system-related errors which may arise in step with the evolution of new payment patterns.

DEVELOPMENT IN PRICES AND WAGES

The annual rate of increase in consumer prices rose throughout 1999 to 3.2 per cent in December. For 1999 overall it was 2.5 per cent. The rate of price increases is buoyed up by such factors as the increase in energy prices. In the course of 1999 oil prices rose from 10 to more than 25 dollars per barrel. Many other commodity prices also increased. Higher prices for public services also contribute to sustaining inflation, as do "Other factors", which reflect the development in wages and profit margins, cf. Table 2. However, it should be noted that "Other factors" and thereby underlying inflation have not undergone the same upswing as overall inflation in 1999. This accords well with the dampening of the wage-increase rate, cf. below.

Table 2 DEVELOPMENT IN CONSUMER PRICES AND NET RETAIL PRICES

	Consumer- price index		Index of net retail prices	Energy	Imports	Domestic prices
						Total	Food- stuffs	Rent	Public services	Other factors
	HICP	CPI	Weights
			1.000	0.085	0.142	0.773	0.160	0.233	0.046	0.334
	Year-on-year growth, per cent
1992	…	2.1	2.1	-3.8	2.5	2.5	1.8	2.0	2.9	3.2
1993	…	1.3	1.4	-0.9	0.0	1.9	-0.2	2.1	1.7	2.7
1994	…	2.0	1.6	-3.1	2.1	2.0	3.0	1.6	2.4	1.6
1995	2,0	2.1	1.9	-2.5	2.5	2.2	3.1	1.8	2.5	2.0
1996	2.1	2.1	2.0	6.6	0.1	1.9	1.7	1.6	1.1	2.4
1997	1.9	2.2	2.2	2.7	0.9	2.4	3.6	2.8	2.2	1.8
1998	1.3	1.9	1.5	-2.8	0.6	1.9	1.8	2.1	-0.9	2.3
1999	2.1	2.5	2.1	2.1	-0.3	2.5	0.6	2.7	3.5	3.0
1998 1st qtr.	1.6	2.0	1.8	-1.7	1.4	2.1	4.1	2.5	-0.4	1.6
1998 2nd qtr.	1.4	2.0	1.7	-0.7	0.9	2.0	2.5	2.1	-1.5	2.3
1998 3rd. qtr.	1.2	1.7	1.2	-4.0	0.4	1.7	0.6	1.9	-1.9	2.6
1998 4th qtr.	1.1	1.7	1.2	-4.7	-0.1	1.9	0.1	2.0	0.4	2.8
1999 1st qtr.	1.4	2.0	1.5	-7.0	-0.7	2.4	0.3	2.8	2.1	3.1
1999 2nd qtr. ….	1.8	2.3	1.8	-1.4	-0.8	2.4	-0.2	2.5	4.5	3.1
1999 3rd qtr.	2.3	2.6	2.3	5.7	-0.2	2.5	0.7	2.8	3.8	2.8
1999 4th qtr.	2.8	3.0	2.8	11.5	0.4	2.6	1.7	2.7	3.6	2.7

Note :

Weighting basis as of September 1996.

The index of net retail prices is the consumer price index adjusted for indirect taxes, duties and subsidies for general price reductions. "Other factors" is a measure of domestic market-determined inflation. "Other factors" normally increases faster than the index of net retail prices due to an overweight of services for which the price development is typically stronger than for other commodities. At the same time, the demand for services viewed in a more long-term perspective will typically increase faster than the demand for other products. HICP is the Harmonised Index of Consumer Prices.

The rate of price increases in the euro area, which like Denmark is affected by rising energy prices, was 1.7 per cent in December. One reason for stronger growth in the Danish price level than in the euro area during 1999 is the greater volatility of Danish food prices, cf. Chart 6. A contributing factor is the strong fluctuations in pork prices in recent years, in connection with first the crisis on the Asian markets in summer 1997, and then the crisis in Russia in autumn 1998. Both areas are important markets for Denmark's pork exports. The greater volatility of Danish food prices is moreover to a degree attributable to stronger seasonal fluctuations than in other countries, but the year-on-year rate of increase is also more volatile. The accelerated rate of increase for foodstuffs in the last part of 1999 is related to a low initial level in the autumn of 1998. A dampening must thus be expected in the near future.

Chart 6 FOOD PRICE INDEX, HICP

Another atypical trend of price development in Denmark is in the telecommunications sector, where in the last 12 months prices in Denmark have decreased by considerably less than prices in the euro area.

Growth in the Harmonised Index of Consumer Prices (HICP) also accelerated during 1999 to 3.1 per cent in December, compared to 1.2 per cent at the beginning of the year. In December Denmark only just complied with the inflation criterion of the Maastricht Treaty, and for the first time since the commencement of the calculation of the individual EU member states' compliance with the convergence criterion, a period of non-compliance must be expected. Due to the special circumstances in the foodstuffs area and a reduction of growth in wages, Denmark is expected to comply with the criterion once again during 2000.

So far, the increase in HICP has typically been slightly below the ordinary consumer price index (CPI) due to methodological differences. This will be adjusted in certain respects in 2000 when the method to calculate the price development at the most detailed level in CPI is harmonised with the theoretically better method for compilation of HICP. Furthermore, after the restructuring certain CPI sub-indices will no longer be subject to seasonal adjustment. The weighting basis in CPI and HICP are still different, however.

Wage development dampened to a degree during 1999. In the 4th quarter the annual rate of increase shown by the wage statistics for members of the Danish Employers' Confederation was 4.2 per cent, against 5.0 per cent in the 1st quarter. The rate of wage increases, which was lowest in the manufacturing sector where competition is toughest, may seem moderate in view of the low unemployment rate, but is nevertheless higher than the wage-increase rate in the euro area, and slightly higher than is compatible with price stability.

The collective bargaining process in the private sector has been completed and the result submitted to a ballot of the members. An innovation is that the agreements run for a four-year period instead of the usual two. For the minimum-wage areas, including manufacturing industry, the agreements observe a cost framework of 1 per cent p.a. In the minimum-wage areas centralised negotiations concern only the overall framework such as working hours, holiday entitlement, minimum wage, pension schemes, etc., while the actual wage increases are negotiated locally at the individual business enterprises. The total increase in costs for the minimum-wage areas thus cannot be determined until local negotiations are completed. The minimum wage has been raised by approximately 2.5 per cent p.a. for the first three years, after which it will be renegotiated for the 4th year without the right to strike. The number of people employed at the minimum wage is small, but the trend for this wage is often taken as an indicator of the level of general wage increases.

In the so-called normal wage areas such as transport, wage rates are negotiated on a centralised basis. The collective agreements in normal-wage areas are within a cost framework of approximately 3 per cent p.a.

All of the agreements concluded entail higher pension contributions and the introduction of five additional days of holiday entitlement, a sixth week of holiday. This aggravates the dilemma in the economy between more leisure time and a high level of public service ^[5].

Real wages have increased year by year during the 1990s, cf. Chart 7. Initially, the increase was slightly below the rate of increase in productivity, but in recent years wage increases have exceeded productivity increases, giving rise to inflationary pressure. This is reflected in e.g. "Other factors" in Table 2.

Chart 7 DEVELOPMENT IN REAL WAGES AND PRODUCTIVITY

Note :

Real wages are calculated as hourly wages in manufacturing industry using the consumer price index as the deflator. Productivity is hourly productivity in the non-agricultural private sector, excluding energy.

In the long view real wages will follow productivity at a given distribution of output between profit and wage income, after adjustment for the development in indirect taxes and indirect labour costs. The rate of productivity increases will naturally decline towards the end of a boom, and wage development must be adjusted accordingly.

In the general-government sector, for which no collective agreements were negotiated in 1999, the rate of wage increases did not slow down in 1999, in contrast to the development in the private sector. This is most pronounced in the central-government sector, where the rate of increase in the 3rd quarter was close to 5 per cent. The background includes the introduction of new, more flexible payroll systems in parts of the general-government sector. The adjustment clause in the collective wage agreements for the general-government sector is retrospective, so that salaries in the general-government sector are adjusted to earlier increases on the private labour market, but high wage increases in the public sector can have an unfortunate spin-off effect on the private sector.

---

Footnotes

[1] See Heino Bohn Nielsen, Market Shares of Manufactured Exports and Competitiveness, Danmarks Nationalbank, Monetary Review, 2nd Quarter 1999.

[2] The current account of the balance of payments is e.g. based on the trade statistics and is compiled and published by Statistics Danmark, while the current payments in the payments statistics are collected and published by the Nationalbank.

[3] The reporting system is described in Lasse Tryde, The Nationalbank's New Reporting System for Payments Statistics, Danmarks Nationalbank, Monetary Review, 2nd Quarter 1999.

[4] A preliminary report, Report on the project concerning improvement of external trade and balance-of-payments statistics (in Danish), was submitted to the Minister for Economic Affairs on 14 December 1999. The report is available on Statistics Denmark's Web site (www.dst.dk) under Guide to Statistics External Trade, Information and Report on the project concerning improvement of external trade and balance-of-payments statistics in the order mentioned above.

[5] Cf. Erik Haller Pedersen, Demography and Growth in Denmark, in this Monetary Review, p. 47ff.

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Version 1.0 March 2000 Nationalbanken.
Published by Danmarks Nationalbank March 2000, http://www.nationalbanken.dk