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Savings and Credit Expansion

The strong economic activity is reflected in the financial balances in the economy.

On the basis of the available statistics the current-account surplus is estimated at kr. 6 billion in 1997. This is a considerable deterioration from a surplus of almost kr. 18 billion in 1996, cf. Chart 5. One particular underlying factor is the trade balance. Exports showed stable growth, while imports accelerated strongly. The balance of services, including the travel item, also deteriorated considerably. Transfers, mainly consisting of development aid and EU payments, continued the trend of a growing deficit. A small part of the deterioration in the balance of goods and services was offset by a decline in interest payments to abroad.

In 1997 the general-government budget showed a surplus for the first time since 1988. The surplus of kr. 7 billion, or approximately 3/4 per cent of GDP, was an improvement of kr. 14 billion on 1996, and is attributable especially to the strong economic development. The budget balance was also improved by the adjustment of the definition of the public sector in connection with the transition to a new method of compiling the national accounts, whereby capital transfers to public enterprises, e.g. DSB (the Danish State Railways), are no longer recorded as expenditure.

In a prolonged economic upswing with low unemployment a small budget surplus is not sufficient to stabilize the development. It is important to use the favourable cyclical position to consolidate public finances. This is particularly important in the light of the substantial foreign debt and the risk of a decrease in private savings as a consequence of a rise in the consumption ratio in coming decades. The average age of the population will increase and state pensions will be supplemented with private pension income to a greater extent than before.

The decline in the current-account surplus and the improvement in government finances were offset by a strong deterioration in the private sector's savings balance from a surplus to a small deficit in 1997, cf. Chart 6.

The deterioration in the savings balance was divided almost equally between households and the business sector. Despite ample increases in disposable incomes in both sectors they were still insufficient to cover the increase in consumption and investments for the year.

When evaluating the development in private savings it must be noted that despite the reductions as part of the tax reforms in both 1987 and 1993 the taxation value of the interest deduction in Denmark still significantly exceeds levels in many other countries.

By definition a savings balance is offset by a financial net placement. The decrease in the private sector's savings balance in 1997 was thus accompanied by an increase in lending by banks and mortgage-credit institutes.

Lending by the mortgage-credit institutes, accounting for approximately 70 per cent of total krone-denominated domestic lending, rose by 7 per cent in 1997, against 6 per cent in 1996. The increase in property prices and the low level of interest rates have entailed strong growth in non-business lending by the mortgage-credit institutes whose lending for owner-occupied homes and summer cottages rose by 10 per cent. Lending to households by the banks increased by 9 per cent.

In step with the upswing business lending rose strongly in 1997. Business lending by the mortgage-credit institutes grew by 4 per cent, while the banks' business lending increased by 11 per cent. More lending was provided for financing activities (e.g. credit card companies and financial leasing) and trading, both related closely to private consumption, rather than to the more export- and investment-oriented sectors.

The money stock, which mainly consists of deposits with the banks, but also includes notes and coins, rose throughout 1997 by just over 5 per cent. Even though the differential between deposit interest rates and bond yields narrowed during 1997 the increase in the money stock was slightly lower than growth in the transaction requirement measured by the value of domestic demand, which increased by almost 7 per cent.

Wage and Price Trends

According to the wage statistics compiled by the Danish Employers' Confederation the rate of wage growth in 1997 was 4 per cent per annum, which was around the same level as in the two previous years. Overall, blue-collar workers have achieved higher wage increases than white-collar workers. The highest wage increases were seen in the building and construction sector and in the service sector. The employment ratio has been rising strongly, cf. Chart 7. In the mid-1980s a strong increase in employment led to overheating of the economy and a shortage of labour, resulting in excessive wage increases on the private and the public-sector labour markets.

During 1996 the wage increases in the core European countries fell from approximately 4 per cent to 2 per cent per annum, cf. Chart 8. The rate of increase in Danish wages did not follow this downward trend and in 1997 the competitiveness of Danish business enterprises weakened in relation to the core countries.

Consumer prices also rose more slowly in the core countries than in Denmark, although the difference is smaller than for wages. Danish real wages have thus risen more strongly than in the core countries and generally also more strongly than productivity. The increase over and above productivity entails a small increase in the wage ratio, while gross business earnings have dampened slightly, but are still at a high level. Reduced profits may have contributed to the reduction in underlying inflation in 1997 and its present low level.

Inflation measured as the year-on-year rate of increase in consumer prices was 2.2 per cent for 1997 as a whole, which is slightly higher than

for 1996. 1997 was characterized by rising import prices and fluctuating prices for energy and certain foodstuffs, including pork, which in some periods pushed up the overall rate of inflation. At the end of 1997 inflation was 2.1 per cent and slightly lower if energy and certain foodstuffs subject to considerable price fluctuations are excluded.

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