Danmarks Nationalbank's comments on The Economic Council, spring 2011

Following the overheating in 2006-08, the Danish economy suffered a sharp setback until mid-2009. At this juncture, two years after the turning point, the Chairmanship expects continued annual growth of 1.5-2 per cent, corresponding to the potential growth in output or just above, but with continued idle capacity. The surprisingly weak GDP data during the winter requires further analysis, but should be seen as a temporary deviation.

Fiscal expansion was unprecedented in 2009 and 2010 and has contributed to prompting the economic recovery. As fiscal policy was also expansionary during the period of overheating before the setback, there is – as pointed out by the Chairmanship – now a need for a return to a long-term sustainable fiscal policy course.

Moreover, the economic outlook calls for a cautious fiscal policy. The private-sector savings surplus – the difference between the sector's savings and investment – is 8 per cent of GDP, which is a historically high level and even higher than in the deep and prolonged economic slumps that bottomed out in 1982 and 1993.

Given that interest rates are also exceptionally low, the large savings surplus is attributable to very cautious consumers and investors. They have undoubtedly experienced a need for consolidation, to some extent due to loss of wealth because of falling house prices and shares. Add to this that uncertainty generated by the financial crisis and the wide fluctuations in the Danish economy have encouraged high savings and restraint on investment.

It is always difficult to predict the turning point in private-sector financial savings. It will occur when consumers find that they have built up adequate buffers, and investors expect real investments to generate a return, including stable selling opportunities for output. However, the private savings surplus represents pent-up potential purchasing power currently totalling around kr. 150 billion. Fiscal policy should be planned so that at least an appreciable part of this purchasing power can be expected to unfold as a driving force behind economic developments in the years ahead.

Unemployment is only slightly higher than the estimated structural level. Furthermore, there is a major labour reserve among people under activation schemes and people outside the labour force. The order of succession for the transition to employment from unemployment, activation and other programmes is important, however. A substantial or rapid decline in current registered unemployment is expected to trigger renewed wage pressures and could arise if the decline in activated and other currently underemployed persons only materialises subsequently. High corporate earnings and imported commodity price rises may also push up wages.

The considerable erosion of competitiveness after many years of wage increases above the levels abroad concurrently with a very weak productivity development increases the need for a cautious stance. Thus, there is no room for another period of overheating.