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Face - Index - Top/Bottom - Previous/Next "Monetary review - 1st Quarter 2002" |
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Recent Economic and Monetary TrendsThis review covers the period from the middle of November 2001 to the middle of February 2002 International economic developmentAfter the global economic downturn in 2001 incipient, but not unam-biguous signs of a recovery are most apparent in the USA, but are also seen in Europe. The yen depreciated by 10 per cent against the dollar, while the euro weakened by 2-3 per cent. The USA has been in recession since March, according to the NBER[1], after 10 years of economic expansion, the longest in the NBER's review period of more than 140 years. The background to the NBER's dating of the recession is described in further detail in Box 1. Recessions in the US economy are typically of relatively short duration. According to the NBER, the recessions since 1945 have lasted 11 months on average. Several indicators suggest that the current recession will be short-lived too. Manufactured output continued to decrease in January, but not as strongly as in the preceding months, cf. Chart 1. The decline in employment diminished in December and January. Retail sales fell in November, but remained unchanged in December and January, and are still well above the level in the same period of 2000. In addition, the consumer confidence index, and especially the ISM[2] business confidence index, rose in December and January, albeit from low levels. The recession is apparent from the national accounts for the 3rd quarter of 2001, which show a decrease of 0.3 per cent in GDP from the 2nd quarter. The decline was strongest for investments, including invent-ories, while private consumption continued to increase at a moderate rate. In the 4th quarter GDP rose by 0.1 per cent, concealing a continued decline in investments and very strong growth in public consumption. Fiscal policy has been eased considerably in response to the cyclical course. In addition to the tax cuts adopted in the summer and the cost increases in the aftermath of the terrorist attacks, the government has proposed further relaxations amounting to 60-100 billion dollars. However, Congress has not reached agreement on the composition of the measures, and their magnitude is also uncertain, not least in view of the tentative signs of a recovery. Box 1 Recession according to the NBER
On 11 December the Federal Reserve cut interest rates for the eleventh time in 2001. The fed funds target rate was reduced by 0.25 per cent to 1.75 per cent, which is the lowest level for 40 years. At its meeting on 30 January, the Federal Open Market Committee decided to hold the fed funds target rate unchanged with reference to positive economic news, notwithstanding the uncertainty concerning the strength of the upturn and the still high risk of continued weak development. Chart 1 Manufactured output and business confidence in the USA
After declining over the summer and in the autumn after the many interest-rate cuts the 10-year government bond yield bottomed out at the beginning of November and has since risen by approximately 75 basis points to 5 per cent, cf. Chart 2. The background to this increase includes the preceding strong decline in yields in the 10-year segment after the US Treasury announced on 31 October that 30-year US government bonds would no longer be issued. The fiscal-policy relaxation and the economic downturn entail a considerable deterioration of the general government budget balance. Compared to 2.4 per cent of GDP in 2000, the balance is expected to be 1.3 per cent of GDP in 2001, and -0.2 per cent of GDP in 2002.[3] The decline in the government savings surplus coincides with a reduction of the private savings deficit, which otherwise has been increasing since the early 1990s. Overall, there is a slight improvement of the balance of payments, which nevertheless still shows a significant deficit of approximately 3.7 per cent of GDP. Chart 2 Interest rates in the USA 
The consensus forecasts[4] point to a reversal of the cyclical trend during 2002, although the exact timing of the recovery is subject to great uncertainty. Capacity pressure is subsiding, and rising unemployment may dampen growth in private consumption and delay the upswing. The considerable private savings deficit may also hamper growth. On the other hand, the economic-policy stance is strongly expansionary, invent-ories have been reduced, and oil prices are still rather low at 18-22 dollars per barrel after declining in the autumn. The course of the 10-year government-bond yield may indicate stronger inflation expectations in connection with an imminent recovery. Despite the general brightening of the macroeconomic outlook the US stock market took a negative course after New Year. The Dow Jones fell by approximately 6 per cent and the Nasdaq by around 12 per cent. This development was affected by such factors as the bankruptcy of several large enterprises, including K-mart and Enron. The Enron case in particular gave rise to uncertainty concerning US accounting practices, since Enron's accounts excluded a number of liabilities, but were nonetheless endorsed by its auditors. Box2 Confidence indicators
After a decade of low growth Japan is now moving into a deeper recession. GDP fell by 0.5 per cent in the 3rd quarter, and seasonally-adjusted unemployment rose from 5.0 per cent in August to 5.6 per cent in December. This is the highest rate of seasonally-adjusted unemploy-ment since 1960, when its compilation began. Manufactured output is very low, and the consumer and business confidence indicators fell strongly during the autumn. All economic key figures point to further negative development, so that an upswing seems precluded in the short run. This is confirmed by the consensus forecasts of growth at -0.3 per cent in 2001 and -1.1 per cent in 2002. As a consequence of the recession, consumer prices in Japan have fallen by 1.2 per cent since December 2000. The Bank of Japan raised the target for the banks' deposits with the central bank in December in order to counter deflation and ensure continued ample liquidity. Since November the yen has weakened by more than 10 per cent against the dollar, cf. Chart 5. Continued depreciation will contribute directly to checking deflation via higher import prices. In the euro area the downturn is milder than in the USA. Total GDP growth was marginally positive in the 2nd and 3rd quarters, but there was a clear dampening in the 3rd quarter when exports declined further after levelling off at the beginning of 2001. Investments and stock adjustments made a negative contribution to growth. Together with a marked decline in imports this paints a picture of a weaker domestic economy. The downturn has not yet affected overall employment, which continues to rise, although at a slower pace. As unemployment continued to take a stable course throughout 2001, the lower GDP growth had an impact on productivity growth which fell after peaking at more than 2 per cent in 2000 to almost zero in the 3rd quarter of 2001. This may reflect that the downturn in the economy is expected to be short-lived, as confirmed by the consensus forecast of quarterly GDP growth in the five largest euro-area member states which indicates that the downturn bottomed out in the 4th quarter. A negative consumer response is the most immediate risk, in view of the low level of consumer confidence. If the recovery in the USA is delayed, and euro-area unemployment begins to rise, the slowdown in the euro area may prove to be of longer duration. The year-on-year growth in manufactured output has decreased strongly since the summer, and has been negative since September, cf. Chart 3. The level of business confidence is also rather low, although it increased in December and January. According to the OECD's autumn forecast the government budget deficit is expected to be -1.2 per cent and -1.3 per cent of GDP in 2001 and 2002 respectively. This is a considerable deterioration from the small surplus in 2000, which was partly attributable to revenue from the sale of UMTS licences. The deterioration in the government budget deficit is not only related to the tax reductions implemented in a number of member states, but also to the automatic stabilisers, i.e. the tendency for diminishing tax revenue and increasing government spending when economic growth decelerates. Chart 3 Manufactured output and business confidence in the euro area
Inflation measured as the increase in the Harmonised Index of Consumer Prices, HICP, fell during the autumn to 2.1 per cent in December, but rose to 2.5 per cent in January, according to preliminary data. The increase is due to such factors as indirect taxes and higher prices for fruit and vegetables. Inflation thus moved away – probably only temporarily – from the ECB's targeted upper limit of 2 per cent for the year-on-year increase in HICP in the medium term. The increase in January is roughly equivalent to the increase in non-euro area member states, the UK and Denmark. It seems that the rounding off of new retail prices in euro did not lead to a general price increase as feared. However, the coming months' HICP development needs close monitoring before definite conclusions can be drawn. Growth in the monetary aggregate, M3, reached 8.0 per cent in November and December, and thus considerably exceeds the ECB's reference value of 4.5 per cent growth in the medium term. The ECB refers to increasing demand for liquid funds in the light of pronounced financial and economic uncertainty as an important contributing factor, just as growth in M3 is not accompanied by a significant rise in credit to the private sector. The ECB has not adjusted interest rates since 8 November 2001. Chart 4 Implicit 1-month forward interest rates in the euro money market
The pattern of implicit forward rates in the euro area shows a signific-ant change since November in the money market's expectations of future ECB interest rates, cf. Chart 4. The curves for the beginning of November and December show that at these times the money market expected short-term interest rates to decrease 7-8 months ahead. At the beginning of February the pattern has changed, as the market now expects almost unchanged short-term interest rates 6 months ahead, and rising short-term interest rates 6-12 months ahead. This indicates a general improvement in economic prospects. On 1 January euro coins and banknotes were put into circulation, marking the start of the largest money conversion in history. The introduction of euro banknotes and coins proceeded according to plan. After 3 weeks the euro was used in around 95 per cent of all cash transactions, and euro banknotes accounted for approximately 60 per cent of the value of total banknotes in circulation. On 4 and 10 January the ECB extraordinarily provided liquidity for 25 and 40 billion euro, respectively, in order to ensure ample liquidity in connection with the changeover. Chart 5 Exchange rates
The euro/dollar rate was relatively stable from October to the middle of January, after which the euro weakened to below 0.86 dollar per euro, cf. Chart 5. Since then, the euro has recovered a little ground. Among the large euro-area member states Germany appears to be most severely affected by the international downturn, since the dampening follows several years of moderate growth, with the exception of 2000, when growth was 3 per cent. GDP growth was a modest 0.6 per cent in 2001, according to preliminary data. The growth rate was -0.1 per cent in the 3rd quarter. Domestic demand fell for all segments, while export growth was surprisingly sound. However, tax cuts and the cyclical slowdown led to a considerable increase in the government deficit, which was around 2.6 per cent of GDP in 2001, or 1.1 per cent higher than estimated at the beginning of the year. This is the largest deficit among the euro-area member states. If growth continues to be low, Germany may exceed the limit of 3 per cent of GDP for the government deficit stipulated in the Stability and Growth Pact. Portugal also risks coming close to the 3 per cent limit. Against this background the European Commission took steps for the EU ministers of economic affairs and finance, the Ecofin Council, to issue an early warning to Germany and Portugal. After Germany and Portugal declared that the limit would not be exceeded, and that they intended to achieve budget balance in 2004, the ministers refrained from issuing early warnings. The UK differs from the other major EU member states by continuing to achieve sound growth. GDP growth was 0.5 per cent and 0.2 per cent in the 3rd and 4th quarters respectively. In the 3rd quarter resilient private consumption in particular contributed to activity, while investments fell. However, several indicators suggest that also the UK is about to be affected by the global downturn. Unemployment rose in October/November after an otherwise stable course in 2001, and the confidence indicators for the service, industrial and manufacturing sectors are now rather low. The degree of spill-over to private consumption will be decisive for whether the UK economy will be able to sustain growth, just as the timing of the recovery in the USA will be of importance. Inflation measured as the annual rate of increase in the RPIX index was 2.6 per cent in January. This is an upturn of 0.7 per cent from December, and is just above the inflation target of 2.5 per cent. Sterling is relatively stable at a high level vis-à-vis both the dollar and the euro. Sweden is also affected by the economic slowdown. GDP growth was marginally positive in the 2nd and 3rd quarters, although this conceals decreasing domestic demand, primarily related to a decline in investments and a significant drop in imports, indicating a weak domestic economy. Sveriges Riksbank's preferred inflation target, consumer prices excluding interest costs and indirect taxes, was 3.4 per cent in December, which is higher than Sveriges Riksbank's target zone of 2 per cent +/- 1 per cent in the medium term. Inflation is expected to diminish during the spring as the effects of previous price increases for e.g. foodstuffs, electricity and telecom services subside. Three years of sustained recession in Argentina reached a culmination in December when the de la Rua government stepped down after rioting and plundering in the streets.[5] In the following two chaotic weeks four presidents came and went. The development up to the middle of February is described below. In December, Argentina suspended payments on its private external debt. On 6 January Argentina abandoned the fixed-exchange-rate policy pursued since 1991 which had kept the peso at a 1:1 parity vis-à-vis the US dollar via a currency board. The government introduced a dual exchange-rate system instead. A new fixed exchange rate of 1.4 pesos per dollar was applied to the central government's external transactions, as well as to exporters and importers, while individual citizens' transactions were subject to a floating exchange rate. The dual exchange-rate system was abandoned at the beginning of February, since it gave a strong incentive for fraud, and the foreign-exchange market reopened on 11 February. The peso is now in principle a freely floating currency, but various restrictions on foreign-exchange trading and intervention by Argentina's central bank indicate that Argentina is seeking to set a bottom limit for the peso rate. In mid-February the exchange rate was 1.95 pesos per dollar, corresponding to devaluation by 49 per cent from the previous parity. The Argentine government has announced a number of initiatives to protect the population from the worst consequences of the devaluation. Among other things, these imply that private dollar-denominated debt to the banks must be converted into pesos at a 1:1 exchange rate, while dollar-denominated deposits are converted into pesos at an exchange rate of 1.4 pesos per dollar. These initiatives partly cushion the enormous losses the devaluation would otherwise impose on the private sector, whose earnings are predominantly denominated in pesos, while most of the private sector's debt is denominated in dollars. Instead, the banks, which are predominantly foreign-owned, will have to bear the losses. The change of monetary-policy regime is accompanied by various fiscal-policy measures such as a tax on oil exports, and a cut in wages and pensions by 13 per cent. Furthermore, a ceiling has been placed on prices for electricity, gas and telephony, in order to counter any inflationary pressure. Constitutional reforms have also been proposed. It is uncertain whether the new government has the political support necessary to implement the proposed reforms, and whether the reforms are sufficient to rescue Argentina's economy. The economy is relatively closed, so the activity-boosting effect of the devaluation will probably be limited, just as the scope of fiscal policy is limited. The decisive factor will be whether Argentina can establish a credible economic policy in an internationally competitive environment. Domestic activity and the balance of paymentsDenmark is also affected by the international cyclical downturn, but so far to a lesser degree than other countries such as Germany. In addition, high capacity utilisation, low unemployment, low inflation and sound surpluses on the current account and public finances together give Denmark a robust starting point to meet any temporary slowdown. Unemployment still fell a little from October to December, and is now 5.0 per cent of the labour force. Employment calculated on the basis of payments to ATP (the Danish Labour Market Supplementary Pension Fund) fell by 9,000 in the 3rd quarter. The manufacturing sector accounted for most of the decline, while public-sector employment rose by 5,000. The construction sector still reports a shortage of labour, albeit less pronounced. Overall, the labour market is still relatively tight, but nevertheless has eased a little. Chart 6 Private consumption and gross fixed capital formation
The national accounts for the 3rd quarter showed GDP growth of 0.5 per cent from the 2nd quarter. Domestic demand stagnated, reflecting a decrease in investments and private consumption and a continued increase in public consumption. Imports fell more than exports. Overall, the national accounts confirm the impression of rather weak domestic demand in an economy close to its capacity limit. Investments fell from a high level, reflecting normalisation after the extraordinary repairs following on the hurricane in December 1999, cf. Chart 6. The Chart also shows that the development in total private consumption has been by and large constant since 1998. However, this conceals a decline in car sales in 1999 and 2000. For private consumption excluding cars the growth rate was moderate from 1998 to the beginning of 2001, after which it was virtually constant. Consumer confidence rose in December and January and became slightly positive once more. Especially Denmark's economic situation was assessed more positively. The confidence indicator for building and construction also rose in December and January, but remained negative. Industrial confidence was stable at a low level in the autumn, but rose in January to an almost neutral level. Output expectations rose in particular. Turnover in the manufacturing industry was constant throughout 2001, after a sound increase in 2000. Taken together, the confidence indicators show a mixed pattern, but the major downward adjustments of expectations seem to be over. Chart 7 Exports, imports and the current account of the balance of payments
Housing prices continue to take a stable course, underpinned by low interest rates. According to the statistics of the Association of Danish Mortgage Banks, prices for one-family and terraced houses rose by 0.7 per cent from the 3rd to the 4th quarters. Greater Copenhagen still accounted for the strongest increases, while housing prices fell in several major provincial centres. After strong growth in 2000, seasonally-adjusted exports were virtually stable in 2001, cf. Chart 7. The dampening of the domestic economy is reflected in seasonally-adjusted imports, which fell from June to October. Imports for consumption declined in particular, but imports to the business sector also fell. The background is the decline in investments, which have a considerable import element. In the period up to December, imports again rose a little. The current account of the balance of payments continues to show a sound surplus, although the surplus was smaller in the 4th quarter of 2001 than one year before, due mainly to substantial imports of aircraft. For 2001 as a whole, the surplus was kr. 33.7 billion, against kr. 20.6 billion in 2000. The improvement can be attributed to balances for services and marine transport, while the balances for wage incomes and transfers to the EU deteriorated slightly. The new government has stated that it "… intends to pursue a tight fiscal policy and continue the stability policy which has been conducted since 1982, based on the fixed krone rate".[6] The 2002 Finance Act implies a redistribution of public spending and a continued sound surplus on public finances. The general fiscal effect is in line with the proposals of the previous government. The overall fiscal-policy stance is appropriate in view of Denmark's current economic situation and future challenges. Development in interest and exchange rates in DenmarkSince mid-May 2001 the krone has been a little stronger than its central rate of kr. 7.46038 per euro in ERM II. Since mid-1997 the day-to-day fluctuations in the krone rate have been moderate, cf. Chart 8. Since November the krone has shown an underlying tendency to strengthen, from a level of approximately kr. 7.45 per euro to just under kr. 7.43 per euro in mid-February. This is the strongest level since the introduction of the euro on 1 January 1999, but is still close to the krone's central parity, cf. Chart 9. From November to January Danmarks Nationalbank's net purchases of foreign exchange amounted to kr. 16.6 billion. In view of the large purchases of foreign exchange in January and the krone's strength and stability, on 1 February Danmarks Nationalbank lowered the lending rate and the rate of interest for certificates of deposit by 0.05 per cent, thereby narrowing the differential to the ECB's minimum bid rate to 0.30 per cent. The 3-month money-market interest rate has remained constant at around 3.6 per cent since mid-November, cf. Chart 10. During the same period the differential to the euro area was 25-35 basis points. The 10-year government-bond yield mirrored the corresponding euro-area yield, and rose by approximately 70 basis points from the beginning of November to the New Year, but then took a more stable course. After a falling trend in September and October the 10-year yield differential to Germany has been relatively stable since November at approximately 15-25 basis points. On 23 November the minimum coupon rate was lowered extraordinarily to 3 per cent, but was then raised again to 4 per cent at New Year. 3-per-cent securities for almost kr. 8 billion were issued, and Danish Ship Finance accounted for almost 75 per cent of these issues. Chart 8 Volatility of the krone rate via-à-vis the euro
Chart 9 Kroner via-à-vis euro
In December, the mortgage-credit institutes held their annual bond auctions in connection with the refinancing of adjustable-rate loans. The auctions proceeded according to plan. Homeowners with mortgage-credit loans subject to annual interest-rate adjustment must pay interest at approximately 3.95 per cent in 2002, compared to approximately 5.6 per cent in 2001. In 2002 the rate of interest for adjustable-rate loans denominated in euro was 45-50 basis points lower than the rate for a corresponding loan denominated in kroner, excluding conversion costs, etc. Chart 10 Money-market interest rates and bond yields
The mortgage-credit institutes' auctions, as well as other factors, meant that the amount to be settled in the Danish money market on 2 January was record-high. The payments were related to the refinancing of loans denominated in kroner for approximately kr. 92 billion, extraordinary redemptions for approximately kr. 80 billion, and interest and redemption payments for approximately kr. 15 billion. Payments for settlement on 2 January in addition to normal settlements totalled kr. 187 billion. Danmarks Nationalbank remained open for purchase and sale of certificates of deposit to prevent any problems arising in connection with the distribution of liquidity among the individual banks and mortgage-credit institutes. The market participants were thus assured of access to liquidity at the rate of interest for certificates of deposit plus 5 basis points on selling certificates of deposit to Danmarks Nationalbank.[7] The settlement of transactions presented no problems. The market and Danmarks Nationalbank knew in advance that liquidity would be ample due to large central-government disbursements on 2 January. In other words, the money market's need to place liquidity (buy certificates of deposit) would be greater than the need to raise liquidity (sell certificates of deposit). The market participants had an incentive to trade among themselves: those wishing to place liquidity could only obtain the rate of interest for certificates of deposit if they bought certificates of deposit from Danmarks Nationalbank, while those wishing to raise liquidity had to pay the rate of interest for certificates of deposit plus 5 basis points, if they sold certificates of deposit to Danmarks Nationalbank. The two parties could therefore meet each other half-way and share the 5 basis points. Nevertheless, the market resorted to Danmarks Nationalbank as counterparty on a considerable scale during the day, since placements for kr. 32 billion were made, and liquidity for kr. 29 billion was raised. Growth in total domestic lending by the banks and mortgage-credit institutes has increased in recent months to a little more than 7 per cent year-on-year at the end of 2001. This is slightly below the level at end-2000. Lending by the mortgage-credit institutes accounted for the strongest increase. Business lending increased less than lending to households, reflecting the dampening of investments. Prices and wagesChart 11 Consumer-price index and domestically-determined market prices
According to the statistics of the Danish Employers' Confederation wages rose by 4.4 per cent in the 3rd and 4th quarters. The rate of growth has thus slowed down from the level of 4.9 per cent in the 2nd quarter, which was inflated by the inclusion of extra days of holiday leave as from 1 May. The rate of wage increase is still higher than in the euro area, confirming the tightness of the Danish labour market. The extension of the maternity leave entitlement puts more pressure on the labour market, particularly within certain groups, e.g. nurses. The Harmonised Index of Consumer Prices, HICP, rose by 2.5 per cent year-on-year in January, compared to 1.7 per cent in November and 2.1 per cent in December. Approximately one per mille of the November increase can be attributed to a shortfall in reporting changes in district heating prices to Statistics Denmark since February 2000. Almost two years' increases in district heating prices were thus included in the consumer-price index at one time in December 2001. The remainder of the increase is due mainly to higher foodstuffs prices. Domestic market-determined inflation, IMI, has risen by more than the
general index in the 2nd half of 2001, cf. Chart 11. This should be viewed
primarily as a normalisation, since the increasing import and energy prices in
especially 2000 were not passed on immediately to consumer prices, but caused
domestic market-determined inflation to level out. The development is
consistent with the interpretation that the rising import and energy prices in
2000 were perceived as a temporary phenomenon.
Footnotes
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Version 1.0 April 2002 Nationalbanken. |
