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Balance of Payments

In 1998 the current account of the balance of payments showed a deficit. This is the first current-account deficit since 1989 and amounted to kr. 16 billion according to preliminary statistics. Since the cyclical upswing began in 1993 a surplus of around kr. 30 billion has thus been replaced by a considerable deficit. This reflects stronger growth in domestic demand than in output during this period.

The substantial deterioration in the balance of payments in 1998 is related primarily to a strong decline in the trade surplus, cf. Chart 4. Stagnating exports were unable to keep up with rising imports since capacity pressure in the economy increased the propensity to import, while the propensity to export diminished.

Chart 4 The Balance of Payments

Note: 12-month moving sum.
Source: Statistics Denmark.

A number of extraordinary factors contributed to the deterioration in the trade balance and current account in 1998. Agricultural exports were affected by low pork prices, while exports declined as a consequence of the labour-market dispute.

Chart 5 Savings balances

Note: For 1998 an estimate has been used.
Source: Statistics Denmark, Ministry of Economic Affairs and own calculations.

The deterioration in the balance of payments in 1998 was offset particularly by an increasing deficit on private savings amounting to kr. 27 billion in 1998, according to preliminary statistics, against a surplus of kr. 2 billion in 1997. This deterioration was far stronger than the improvement in government finances from a surplus of kr. 1 billion in 1997 to a surplus of kr. 11 billion in 1998, cf. Chart 5. This reflects the automatic effects of the upswing.

To ensure future scope for manoeuvre in economic policy it is crucial that the foreign debt be eliminated within a reasonable period, particularly in the light of the demographically-induced changes in the provider burden as a consequence of the ageing of the population in coming years. It is thus important to pursue a sufficiently tight fiscal policy which ensures a balanced economic course and the required degree of consolidation.

Denmark's External Debt

Preliminary calculations show that Denmark's external debt rose by kr. 12 billion to kr. 280 billion in 1998. The increase is attributable to the current-account deficit in 1998.

The compilation of Denmark's external debt at the end of 1998 is based on the balance at end-1997, to which the current-account deficit in 1998 is added, and adjustment is made for recorded and calculated value changes in Denmark's external assets and liabilities. Preliminary statistics indicate a current-account deficit of kr. 16 billion. Value adjustments are estimated to reduce the net debt by kr. 4 billion.

In 1998 the foreign-exchange reserve decreased by kr. 29 billion, cf. Table 3, due to the Nationalbank's sale of foreign exchange in periods when the krone was under pressure.

The central government's debt to non-residents fell by kr. 14 billion during 1998 since the proceeds from the sale of shares in Tele Danmark to abroad were used to reduce the central government's foreign debt. Moreover, non-residents sold back Danish government bonds denominated in kroner.

Contrary to their resale of Danish government bonds in 1998, non-residents bought Danish mortgage-credit bonds. Yields on government bonds fell in 1998, and the yield differential to Germany narrowed. At the same time the yield differential between mortgage-credit and government bonds widened.

In 1998 residents purchased foreign bonds for kr. 22 billion. This continues the tendency of previous years for growing domestic portfolios of foreign bonds.

Since 1995 the holdings of foreign shares of Danish business enterprises, institutions and households have more than trebled. In 1998 net purchases of foreign shares were a record-high kr. 31 billion, to which capital gains of kr. 24 billion should be added. Capital gains arise because residents primarily hold shares issued by US and western European businesses, for which market prices rose in 1998.

Non-residents' holdings of Danish shares also increased in 1996 and 1997. This trend was reversed in 1998 when non-residents resold Danish shares for kr. 15 billion.

Table 9 of the Appendix of Tables states assets and liabilities in 1991-98 distributed on key sectors.

The Nationalbank has implemented a survey of the accounts with non-residents at end-1998 of approximately 2,000 Danish business enterprises and institutions. A corresponding survey was carried out for 1996. On the basis of the survey results revisions of the preliminary compilation of the external debt at end-1997 and end-1998 can be expected. The survey results will be published in the autumn of 1999.

Chart 6 Development in domestic lending by banks and
mortgage-credit institutes

Note: Kroner and foreign currency. Adjusted for losses and provisions. Accumulated since January 1993.

Credit Expansion

The considerable decrease in the private savings balance is offset by an increase in lending by banks and mortgage-credit institutes, cf. Chart 6.

The banks' total domestic lending at end-1998 exceeded the end-1997 level by kr. 57 billion, which is an increase of 14 per cent. Business lending accounted for kr. 45 billion. The banks' business lending normally matches the business cycle, but with a considerable time lag. At the beginning of an upswing business enterprises have unutilised capacity and conditions for own financing are favourable. Debt financing is not required until later, when capacity utilisation is higher.

At end-1998 lending by the mortgage-credit institutes was kr. 79 billion higher than one year before, an increase of 8 per cent. Lending for owner-occupied homes accounted for kr. 57 billion. Business lending rose by kr. 16 billion, while lending for subsidised construction and to the public sector increased by kr. 6 billion.

The money stock, which consists of deposits with the banks, as well as banknotes and coins, rose by 4.6 per cent in 1998. This is in line with the increase in the transaction requirement measured by the value of domestic demand.

Wage and Price Trends

During 1998 wages in Denmark accelerated. Hourly earnings rose by 4.4 per cent from 1997 to 1998, against 4.0 per cent for the preceding period, according to the wage statistics compiled by the Danish Employers' Confederation (DA).

This wage growth reflects the tight Danish labour market. Several sectors report a shortage of labour, e.g. in building and construction where wage increases were 5.0 per cent in 1998.

During the collective negotiations in the spring of 1998 wage earners rejected the official conciliation proposal. This released a labour market dispute with effect from 27 April 1998. The dispute ended with legislative intervention on 7 May 1998. The settlement upheld the employers' cost ceiling from the rejected conciliation proposal, but reduced the increase in pension contributions in favour of extra days of leave.

Wage increases in Denmark are significantly higher than abroad's, cf. Chart 7, and Denmark's wage competitiveness has deteriorated. If Denmark is to retain its competitiveness, Danish wage costs must not in the long term exceed wages in the euro area. This leaves limited scope for wage increases in the coming years.

Chart 7 Wage increases in Denmark and abroad

Note: Abroad, total is the countries included in the effective-krone-rate index. The wage increases are weighted together using the weights of the index.
Source: OECD, Statistics Denmark and own calculations.

In view of current harmonised unemployment rates of respectively 4.6 and 10.8 per cent in Denmark and the euro area, the Danish labour market will be tighter than that of the euro area for some time to come, however. This emphasises the need for wage restraint in Denmark. A dampening of domestic activity compared to abroad would reduce the tendency for excessive wage increases in Denmark.

Growth in consumer prices continues to be moderate, cf. Chart 8. Inflation in Denmark measured by the year-on-year rate of increase in consumer prices was 1.9 per cent in 1998, compared to 2.2 per cent in 1997. The HICP inflation rate was 1.3 per cent. This is in line with inflation in the euro area. Inflation is kept down by weak growth in energy, import and food prices. On the other hand underlying inflation, which is a measure of domestic market-determined price increases, rose during the year. One cause was the accelerating wage increases.

Current wage and price trends continue to push up real wages, which also exceed real wage increases abroad, especially in the euro area. There are significant variations in earnings trends in the various sectors and between wage earners and the self-employed, however. Employees in building and construction and in the computer and IT sector enjoy particularly high wage increases, whereas the agricultural sector is under pressure.

Chart 8 Consumer-price increases and underlying inflation

Note: Underlying inflation reflects the domestic market-determined inflation. Underlying inflation has a high content of services and will therefore normally exceed the increase in consumer prices.
Source: Statistics Denmark and own calculations.

Economic Prospects

In 1998 Denmark's foreign debt rose by kr. 12 billion to kr. 280 billion and accounts for approximately 25 per cent of GDP. Interest payments on the debt absorb a considerable proportion of total revenue in the economy and the foreign debt makes Denmark exposed in the event of unrest on capital markets. It is therefore important to reduce the debt within the foreseeable future, particularly because the age profile of the population will shift in coming years and the proportion in employable age groups will decline. This is equivalent to saving up to meet the obligations this imposes.

After several years of high economic growth, at the end of 1998 a number of economic indicators point to a dampening of the economy. A slowdown compared to abroad may reduce the balance problems in the economy and improve the balance of payments, cf. Chart 9. However, a prerequisite for restoring a sound current-account surplus is a prolonged period of lower growth in domestic demand in Denmark than abroad. This for example requires a definite dampening of private consumption, which accounts for around half of domestic demand.

Chart 9 Relative domestic demand and balance of payments

Note: The balance of payments is a 12-month moving average. Domestic demand abroad is weighted together using the weights of the effective-krone-rate index.
Source: OECD, Statistics Denmark and own calculations.

The political measures taken are intended to have this effect, but the exact dampening effect on prices for owner-occupied homes and the impact on the private consumption ratio are as yet unknown. Furthermore, the drop in interest rates throughout 1998 may refuel consumption. To achieve an increase in the savings ratio a further tightening of economic policy may be necessary. In the current situation where capacity utilisation is still generally high a tighter fiscal policy can restore balance to the economy without any major effects on employment, since available capacity can be used to regain export market shares.

Another risk element is a dampening of growth abroad. This might make it difficult for Denmark to achieve sufficient improvement in the balance of payments. According to the OECD's latest forecast growth is expected to slow down in 1999 and domestic demand in Denmark's trading-partner countries is expected to rise by 2.1 per cent in 1999, against 3.0 per cent in 1998.

In order to achieve a balanced course in Denmark pressure on capacity must be reduced. For a number of years the Danish labour market will probably be tighter than in the euro area, but to retain competitiveness higher wage-increase rates in Denmark must be avoided. Otherwise there is a risk of a repetition of the abrupt end to the boom in 1986-1987.