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The economic outlook for the 2nd half of 2011, and presumably early 2012, has weakened due to financial turmoil, recurrence of the debt crisis in economically weak euro area member states and dampening of the international business cycle over the summer. The Chairmanship has adjusted growth substantially downwards, also well into the forecast period. Consumption, investment and exports are now estimated to show weak development, and the large negative output gap is expected to remain unchanged up to and including 2013. However, there are not published economic indicators that far ahead.
Two sets of strongly opposed forces are impacting on developments. Many of the northern European countries, which are not directly affected by the debt crisis, have a large potential for higher domestic private-sector demand. Savings ratios are high and investment ratios low. Add to this historically low interest rates. The opposing forces are financial turmoil and falling stock markets. If the debt crisis in southern Europe is not contained more effectively, this may prolong and exacerbate the crisis and slow down the cyclical normalisation process throughout the EU.
The current economic situation is not a traditional recession, but a confidence crisis and in some countries, including Denmark, an inescapable consequence of previous years' overheating. Consumers tighten their purse strings and firms do not invest, despite very low interest rates. In this situation, economic policy instruments do not necessarily have the usual effect. There may be a risk of excessive (non-linear) negative side effects if developments are either very weak or, conversely, once again challenge capacity limits with a risk of a further strain on competitiveness. This calls for a high degree of fiscal prudence.
Following the overheating of the Danish economy in 2006-08 and the strong downturn, the Chairmanship estimates the output gap at some 4 per cent of GDP. Danmarks Nationalbank's estimate is somewhat lower. On the other hand, the estimates of the employment gap are more or less identical at around 50-60,000 full-time equivalents. Both estimates emphasise that a return to the peak employment level in 2007-08 is neither possible nor desirable and should not be an economic policy target.
Danmarks Nationalbank agrees with the analysis of property taxation. The decoupling of property value tax and housing value is harmful in terms of stabilisation and worsened the overheating in 2007-08. Likewise, it is contributing to prolonging the current weakening of the housing market. Houses with the same value are taxed differently. Regionally, price falls are amplified in peripheral areas. In a long-term perspective, the macrofinancial implications are considerable. The Chairmanship's analyses show that the freeze on property value taxes has also contributed to widening the income dispersion.
The Chairmanship is right to highlight the importance of the sound medium-term perspective in economic policy, with focus on fiscal sustainability. This requires firm management of public expenses combined with structural reforms. The retirement reform is an important step in the right direction. |
