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"Monetary review - 4th Quarter 2000"

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Domestic activity and the balance of payments

After a number of years of high growth driven by rising private consumption, leading to a deterioration of the balance of payments, economic activity shifted to a lower gear in 1999. The background was a significant dampening of domestic demand and thereby of imports. The result has been remarkable. Business enterprises were able to increase exports, while external factors such as the improved competitiveness attributable to exchange-rate developments, increased activity on Denmark's export markets and higher oil prices also contributed to a significant improvement in exports and in the balance of goods and services in 1999. The structure of growth in the Danish economy is now far closer to balance than it has been for a long time, cf. Chart 8. Growth was on the rise again in the 1st half of 2000. According to the preliminary national accounts GDP increased by 3.2 per cent against the first half of 1999. Investments and stockbuilding were the primary growth factors, rather than private consumption, which made no contribution. The latter is related primarily to a decrease in car purchases, in view of the replacement of the car fleet during preceding years. The strong growth in investments in the 2nd quarter is due mainly to higher investments in machinery and equipment, while residential investments decreased against the 1st quarter.

Chart 8 Contributions to growth in Denmark, 1997-2000

Residential investments are nonetheless still at a high level compared to the preceding year, and the confidence indicator for building and construction showed a positive trend in the 3rd quarter, compared to the 2nd quarter. House prices rose in the 2nd and 3rd quarters, but the rate of increase declined. The annual rate of increase in house prices is falling, but is still considerably higher than the rate of increase in consumer prices. The industrial confidence indicator has also risen strongly during 2000.

In the course of the spring and summer unemployment stabilised, and the unemployment rate was 5.5 per cent in September. Employment continued to rise in the 1st half of 2000, however, and has increased by approximately 35,000 people in total since the beginning of the year, according to the statistics from ATP (the Danish Labour Market Supplementary Pension Fund). During that period wage increases subsided, but there is still a considerable risk of bottlenecks, should the growth rate accelerate.

Most elements of Denmark's economic policy are now in place after the government's political agreement with a number of political parties represented in the Folketing (Parliament) on the Finance Act for the next year. The principal elements of the policy are as expected after the presentation of the Finance Bill in summer 2000. On the one hand, a considerable government finance surplus, equivalent to more than 2 per cent of GDP, is expected in 2001, while on the other hand the fiscal policy in 2001 will be more expansionary than in 2000.

The Nationalbank finds that it is not its task to comment on the size of the budget for as long as the macroeconomic balance is ensured in accordance with the requirements of the fixed-exchange-rate policy. In contrast to previous years, however, the agreements do not contain significant structural improvement elements. As a consequence, real growth in government consumption in 2001 is now estimated to be somewhat higher than the government's medium-term objective of an increase in government expenditure on services of 1 per cent per annum.

The government has proposed a restructuring of the taxation of pension earnings. The impact on revenue will be neutral. The main element of the proposal is that the tax rates introduced in the Whitsun package of economic measures of 5 per cent of yields on equity securities and 26 per cent of yields on debt securities be amended to a uniform tax rate of 15 per cent on both types of securities. This measure will not only contribute to simplifying the taxation of pension yields, but also reduce the interest-guarantee problem. The latter relates to the fact that pension funds and life assurance companies have guaranteed their customers a minimum return which, at the time when the guarantee was given, appeared to be low, but nevertheless presented problems when interest rates and inflation fell because the companies had no opportunity to hedge these very long-term nominal guarantees. The key implication for the market of the proposal is a drop in the price of index-linked bonds issued before the Whitsun package of economic measures, because the relative advantage of the tax exemption of these index-linked bonds declined when the tax on other bonds was eased. The price drop for index-linked bonds indicates that inflation expectations cannot be determined as the difference between a nominal yield and the yield on index-linked bonds, unless the taxation aspect is specifically taken into account.

Since the turn of the year the rate of growth in krone-denominated lending to residents from the banks' head offices in Denmark has been artificially high. This is due to several banks' transfer of lending to residents from units abroad (primarily in Dublin) to the head office in Denmark after the lapse of the stamp duty on loan agreements which are not entered to the title register. The growth in domestic lending, including lending by foreign units, has been declining in recent months, albeit from a high level. Throughout 2000 the annual rate of increase in the mortgage-credit institutes' lending has been around 4-5 per cent.

After September the reporting scheme for the Nationalbank's balance-sheet statistics for banks and mortgage-credit institutes was adjusted. Currently the statistics are being restructured, and will be published in a new format as from January 2001. Until then, the balance-sheet statistics will be published in an abbreviated form, after adjustment for the change in methodology. As part of the restructuring of the statistics historical time series are calculated according to the new method. The historical time series up to end-2000 and the new format of the balance-sheet statistics will be presented in a separate publication in January 2001.

On 2 October 2000 Danske Bank and RealDanmark presented their plans to merge the two groups. The merger has now been formally accepted by the owners of the two groups and approved by the competition authorities. The total balance sheet of the group which is the result of the merger, Danske Bank, will be kr. 1,314 billion. The new Group's balance sheet is equivalent to a market share of around 40 per cent of the Danish banking and mortgage-credit market. For comparison, the total balance sheet of the largest Nordic financial group, Nordea ^[1], is expected to be kr. 1,645 billion after the merger with Christiania of Norway.

Statistics Denmark has revised the current account of the balance of payments. This primarily concerns a change in the treatment of international reinsurance, non-distributed dividend and the status of the Faroe Islands and Greenland. The preliminary current-account figures for the 12 months up to and including August 2000 show a surplus of kr. 25 billion.

To a certain extent the claims on Danish insurance companies arising from the hurricane on 3 December 1999 were covered by internationally written reinsurance. On the basis of international standards for national accounts Statistics Denmark has decided to carry damages paid from abroad as of the time of the event releasing the claim.

The final compilation of reinvested profits (non-distributed dividend) on direct investments showed higher net income in 1998 than previously estimated. The existing estimates for 1999 and the 1st half of 2000 have therefore been revised upwards.

As part of the adjustment to international standards, in future the Faroe Islands and Greenland will be treated as foreign countries in the balance-of-payments statistics. In the first instance this has led to a revision of the data as from 1997.

Impact of oil prices on the balance of trade

Oil and natural gas prices have more then trebled since the spring of 1999. Despite strong fluctuations the price of oil has generally stayed above 30 dollars per barrel since September, and in mid-November the oil price was a good 31 dollars per barrel.

Denmark's oil and natural gas production has increased steadily for many years and the degree of self-sufficiency has risen. Taken as one, self-sufficiency in energy is estimated by the Danish Energy Agency at 118 per cent of consumption in 1999, compared to 102 per cent in 1998. Self-sufficiency in oil and natural gas is estimated to have been 159 per cent in 1999. A higher degree of self-sufficiency naturally implies a reduction of the requirement to import energy.

Since overall Denmark is a net exporter of energy, the rising energy prices since 1999 have contributed to improving the overall terms of Denmark's external trade. The terms of external trade of energy products have also improved, since the crude oil price has a stronger impact on energy exports than on energy imports. The higher energy prices and the increasing level of self-sufficiency have led to a rising, but still modest, trade surplus for fuels, lubricants and electricity, cf. Chart 9. Denmark's situation thus differs considerably from that of the other European countries which are either net importers or major net exporters of energy.

Chart 9 Oil price and trade balance for fuels, lubricants and electricity

The impact on Denmark's trade balance of the rising oil and natural gas prices as a percentage of GDP is thus moderate compared to a large number of both energy-exporting and energy-importing countries. The impact on the current-account balance is even less since a large proportion of the production of raw materials from the North Sea is undertaken by companies which are partly in foreign ownership, so that increased profits will entail higher dividend payments to abroad. Should the oil price be significantly lower, and the dollar weaker, the current-account surplus is expected to be diminished, but not eliminated completely.

Compilation of Denmark's external debt

The Nationalbank has compiled Denmark's external debt for 1999. These statistics are based on a comprehensive questionnaire survey with more than 2,100 respondents (primarily private companies, but also local governments and social security funds). There were also supplementary sources concerning the general government, the Nationalbank and the banks.

At end-1999 Denmark's external debt totalled kr. 174 billion, against kr. 306 billion at end-1998. The decrease by kr. 132 billion in 1999 can be attributed primarily to extraordinarily large value changes concerning securities portfolios. At year-end residents held net assets abroad as equity securities, and net liabilities as debt securities. Stock prices generally rose strongly, while bond prices fell, so that overall the external debt was strongly diminished by the value changes. The most recent compilation of the current account is a surplus of kr. 27 billion in 1999. It thus accounts for only a minor proportion of the decrease in the external debt, which in individual years is increasingly influenced by the development in market and exchange rates.

Development in wages and prices

In October consumer prices, measured as the Harmonised Index of Consumer Prices (HICP), were 2.8 per cent higher than one year before. Measured in terms of "Other factors" underlying inflation continued to rise only very moderately in the 3rd quarter. The decrease in wage inflation has contributed to the reduction of underlying inflation, while profit margins may have been squeezed by the rising energy and import prices. The rates of increase for rent and foodstuffs also fell. The high inflation rate is therefore attributable primarily to external factors such as the direct impact of large price increases for energy and imported goods, cf. Table 1. In a future-oriented perspective it is vital that increasing energy prices are not passed on to the labour market as wage increases which are out of sync with the development in productivity. The rate of increase in Denmark's HICP has for some time been higher than the rate of increase in HICP for the euro area. Most recently, however, the inflation differential became almost non-existent, cf. Chart 10.

Table 1 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	0,088	0,143	0,769	0,144	0,250	0,039	0,335
	Year-on-year growth, per cent
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	1.8	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
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
2000 1st qtr.	2.8	3.1	3.4	24.1	2.1	2.1	2.6	3.1	3.6	1.0
2000 2nd qtr. …	2.9	3.2	3.5	21.6	4.1	2.0	3.4	3.5	3.6	0.3
2000 3rd qtr. …	2.6	2.7	3.0	18.3	5.1	1.4	2.3	3.0	4.3	-0,4

Note:

Weighting basis as of December 1999. 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 rise in demand for services is typically stronger in the longer term than demand for other products. HICP is the Harmonised Index of Consumer Prices.

Chart 10 Inflation in Denmark and the euro area

Note.: Annual rate of increase in HICP.

The rate of wage increases declined in 2000 compared to previous years. In the 1st and 2nd quarters hourly wage costs in the manufacturing industry rose by approximately 3.5 per cent against the same period of 1999. In the 3rd quarter the rate of increase accelerated a little. As the wage increases in the euro area have gained momentum since mid-1999 the wage-increase rates have converged, cf. Chart 11. One factor behind the higher rate of wage increases in the euro area is the reduction of working hours in France. In view of the considerable pressure on the labour market, there is still a risk that the rate of wage increases in Denmark will begin to rise again.

Chart 11 Hourly wage costs in manufacturing industry in Denmark and the euro area

Sources: Statistics Denmark (Denmark) and Eurostat (euro area).

Footnotes

[1] Formerly Nordic Baltic Holding.

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