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The Danish EconomyThe global economy weakened significantly, but the Danish economy stayed relatively robust in 2001. Unemployment remained low, and the balance of payments showed a sound surplus. Inflation fell, and was lower on average than in the euro area. Nonetheless, economic growth was below the level of 2000, while domestic demand was by and large unchanged. A short-lived weakening of the global economy is not a problem for the Danish economy in the current situation of high capacity utilisation and a tight labour market. The rate of wage increase again exceeds the level abroad. There is a risk of sustained high wage increases and deteriorating competitiveness. It is therefore necessary to ease the pressure on the labour market. At a high level of activity a stronger influx to the labour force and better utilisation of idle resources are required. Further reduction of the government debt is just as important, in order to create scope for the future demographic structure with more elderly people and a diminished population of working age. International backgroundThe global economy almost came to a standstill during 2001. Before the year began, growth in the gross domestic product (GDP) of Denmark's trading partners was estimated at 3.1 per cent for 2001. However, the OECD's autumn forecast indicated a growth rate of 1.3 per cent.[1] This is the lowest level for eight years, and reflects stagnation or a direct decline in large parts of the year. The negative trends were strongest in the USA and Japan, but the euro area was also affected, cf. Chart 1. The significant drop in oil prices dampened price development. The USA has been in recession since the spring of 2001 after the longest upswing for more than 50 years. Yet as a consequence of the strong growth throughout 2000, total output in 2001 was still more than 1 per cent above the average for 2000. The downturn is due especially to the decline in business investments from a very high level, and more subdued growth in consumer spending. The US economy weakened further after the terrorist attacks on 11 September. Consumer confidence declined and unemployment increased further. The downturn in employment worsened during the autumn, and spread to the service sector. Even though domestic demand was dampened the balance of payments improved only slightly.
In response to the weakening of the economy, both monetary and fis-cal policy were eased. The USA has a broad monetary-policy objective which is to contribute to maximum employment, as well as stable prices, and a moderate level of long-term interest rates. In 2001 the strategy was to counter diminishing demand with an expansionary monetary policy. The Federal Reserve thus cut the fed funds target rate by a total of 4.75 per cent on 11 separate occasions during 2001, thereby reducing the rate to 1.75 per cent, which is the lowest level for 40 years. The government budget surplus fell from 2.4 per cent of GDP in 2000 to 1.3 per cent in 2001, and a deficit is expected in 2002.[2] Inflation declined during 2001, but disregarding items such as energy and foodstuffs the annual rate of increase was stable at around 2.7 per cent. Towards the turn of the year there were dispersed initial signs that the economy was recovering. Various confidence indicators became less negative and employment decreased less strongly. Japan's economic situation deteriorated throughout 2001. In the 2nd and 3rd quarters output began to drop, and this is expected to continue into 2002.[3] The economic reversal follows a full decade of low growth at around 1 per cent per annum. Japan's exports were affected by the dampening of the global economy, and domestic demand was weak in 2001. Unemployment has been increasing for some years and now exceeds 5.5 per cent, the highest level for decades. The level of prices fell throughout 2001. The government maintained its expansionary fiscal policy in order to stimulate economic activity, and the government debt rose to 130 per cent of GDP. The Bank of Japan pursued an expansionary monetary policy, and the short-term interest rate was close to zero. The euro area was affected by the deterioration in the global economy, and the strong growth in 2000 was followed by a marked decline in 2001. Provisional estimates of economic growth were thus revised downwards by 1.5 per cent during the year to the level of 1.6 per cent.[4] In Germany the slowdown was significant. The euro area's exports weakened during the year, and domestic demand was driven by private and public consumption, while investments fell. Unemployment was by and large unchanged in 2001. The average rate of increase in consumer prices in the euro area was 2.6 per cent in 2001, compared to 2.3 per cent in 2000. Inflation rose at the start of the year, but subsequently declined. Disregarding energy and foodstuffs, inflation rose throughout 2001. The definition of price stability of the European Central Bank (ECB) is a year-on-year increase in consumer prices of below 2 per cent in the medium term. The euro area has a clearer dividing line between monetary and fiscal policy than the USA. Price stability is a treaty-bound objective of the ECB, and monetary policy can only be used to support economic activity if this does not jeopardise the prospects for price stability. During 2001 the ECB reduced the interest rate on four occasions by a total of 1.5 per cent to 3.25 per cent. The more cautious lowering of interest rates than in the USA is also related to the relatively high rate of price increase. Moreover, at the beginning of the year interest rates were below the USA's level. The public finances of the euro area as a whole moved from a small surplus in 2000 to a deficit in 2001. In 2000 public finances were affected by the extraordinary revenue from sale of transmission licences for 3rd generation mobile telephony. The deterioration in 2001 was also related to dampened growth and tax-relief measures in several member states. An upturn in the economy during 2002 is widely expected. By the turn of the year the negative business and consumer confidence trends had been overcome, although the confidence indicators are still at a low level. GDP growth in the UK exceeded 2 per cent in 2001. Growth was driven by private consumption. Inflation rose in the 1st half-year, but then declined. The labour market remained tight. The international slowdown severely affected exports from Sweden. Private consumption was likewise weak, and GDP growth was around 1.5 per cent in 2001. Inflation was higher than in 2000. GDP growth in Norway was 1.4 per cent in 2001. Norway's economy was characterised by high capacity utilisation and a tight labour market. Disregarding adjustments to indirect taxes and energy prices, inflation was unchanged around the Bank of Norway's inflation target of 2.5 per cent. This target was introduced in March 2001. Economic activity in DenmarkDenmark's economy was robust compared to most other countries in 2001. Unemployment remained low, and total employment was still high. There was a sound surplus on the balance of payments, and public finances likewise showed a surplus. Nonetheless, the Danish economy lost ground in 2001, achieving GDP growth of just over 1 per cent, compared to 3 per cent for 2000, cf. Table 1. The low growth is due to dampened business investments and a strong decline in housing investments. In 2000 the latter were affected by the extensive repairs necessary after the hurricane in December 1999. This made an extraordinary contribution to growth in 2000, and negatively affected growth in 2001. The slowdown in business investments is accompanied by declining capacity utilisation, and very high investment activity in 2000. To some extent growth in 2001 was set off by extensive stockbuilding, of which a proportion may have been unintended. Export growth diminished, but the low domestic demand also dampened imports. The composition of growth was more balanced than in preceding years, cf. Chart 2.
Private consumption rose by just over 1 per cent in 2001, and was subdued, despite low unemployment and high property prices. Housing priceswerebuoyedupbylowinterestrates,butthegeographicaldistributionofthedevelopmentinpriceswasveryuneven.Thestrong price increases in the Greater Copenhagen area have pushed up growth in the general index. Price increases were sustained by the limited supply of sites for new construction in the Greater Copenhagen area. The net savings of the private sector have risen in recent years, with a savings surplus equivalent to 0.6 per cent of GDP in 2001. As the first surplus on private savings since 1996 this should be viewed against the elements of the Whitsun package of incentives to stimulate savings, and the development in investments in 2001. Growth in government consumption and investments was 1.8 per cent. Fiscal policy was moderately contractive measured in terms of fiscal effect, taking the structural effects of the Whitsun package into account. The government budget surplus was almost 2 per cent of GDP in 2001, compared to 2.5 per cent in 2000. The diminished surplus is due mainly to falling stock prices, reducing proceeds from taxation of pension returns, and is only to a minor degree related to the dampening of economic activity. The restructuring of the taxation of pension returns has made government revenues more sensitive to fluctuations in stock prices.
The tight labour market and expansionary financial conditions made a moderately contractive fiscal policy appropriate. Especially short-term interest rates fell throughout most of 2001, and the effective krone rate remained at a low level, even though the declining trend was reversed, cf. Chart 3. Total employment rose by 15,000 in 2001, cf. Table 2. The annual growth in employment has diminished in recent years, but the employment level is high. Private-sector employment declined in the 2nd half of 2001, while employment in the public sector rose throughout the year.
Sources:Statistics Denmark, Eurostat, the Directorate General
for Employment Placement and Vocational Training and own
calculations. Output rose only slightly more than employment, reflecting a mod-erate rise in productivity. The dampening of economic growth was not reflected in registered unemployment, which closed the year at 5 per cent – the lowest level for more than 20 years. The labour market remained tight, with a shortage of manpower in certain sectors.
Balance of paymentsThe current-account surplus was almost kr. 34 billion in 2001, equivalent to 2.5 per cent of GDP. Moderate domestic demand dampened imports and reduced capacity utilisation. Idle capacity can be used to increase output for export, although exports also depend on growth on export markets and the development in competitiveness. Agricultural and energy exports, as well as sea freight, benefited from high prices for a period. Manufactured exports remained by and large unchanged throughout 2001, and the surplus on the balance of goods was maintained at a high level, cf. Chart 4. A substantial current-account surplus and low unemployment bear witness to favourable competitiveness, notwithstanding the development in the effective krone rate and wage levels in 2001. The international slowdown weakened Denmark's export markets, but Danish exports tend to be less sensitive to cyclical fluctuations than exports from the other EU member states. The reason may be that Denmark's exports include a larger element of services, including sea freight, as well as agricultural products and pharmaceutical products, than exports from most other European countries, while traditional manufactured products account for a smaller share. Moreover, Denmark has a relatively large number of small and medium-sized enterprises with a strong capacity for rapid adjustment. Less volatile exports mean that, all other things being equal, Denmark's market share increases in periods of low international growth, which was also the case in 2001. In the longer term, there is a clear relation between the development in costs and market shares. It is therefore vital that Denmark's wage-increase rate does not exceed that of the euro area.
The current-account surplus contributed to reducing Denmark's external debt, viewed in isolated terms. The external debt is also affected by value adjustment of assets and liabilities (shares and bonds).[5] Credit expansionIncreased private savings and diminished investments were reflected in lending by banks and mortgage-credit institutes. The growth in business lending dampened into the 1st half of 2001, cf. Chart 5. Towards the end of the year the rate of increase gained momentum, but was still below the preceding years' level. Lending to households rose mod-erately during the 2nd half of 2001.
The significant decline in especially short-term interest rates in 2001 contributed to an increase in the proportion of homes financed with mortgage-credit loans at adjustable interest rates. At end-2001, variable- interest loans were close to kr. 240 billion, equivalent to 20 per cent of total mortgage-credit lending, against 9 per cent in 2000. Around 20 per cent of the variable-interest loans were denominated in euro. The money stock, M3 (primarily the deposits with the banks of private individuals and business enterprises, together with their holdings of banknotes and coins and short-term mortgage-credit bonds), increased by just over 7 per cent in 2001. This is slightly more than the transaction requirement measured as the value of domestic demand. Wage and price trendsThe rate of wage increase accelerated in 2001 to exceed 4 per cent at the close of the year. The adjustment of 4 family-leave days to 4 extra days of holiday leave was incorporated in the 2nd quarter, which explains the abrupt increase in the rate of wage increase in that quarter. An annual rate of wage increase of more than 4 per cent exceeds wage increases in the euro area. The rate of increase in Danish wages has thus again moved away from the rate in the euro area after the two preceding years of convergence, cf. Chart 6. Over time the high Danish wage increases can present problems for Danish competitiveness and the objective of price stability. It is therefore important to dampen wage development, despite the tight labour market that will probably stay tighter than in the euro area in the immediate future. At the close of the year the EU-harmonised unemployment rates were 4.4 per cent in Denmark and 8.5 per cent in the euro area.
Measured in HICP terms, inflation in Denmark declined for most of 2001, cf. Chart 7. The average rate of price increase in 2001 was 2.3 per cent, compared to 2.7 per cent in 2000. The price increases gained momentum at the turn of the year, partly due to energy and foodstuffs. Despite higher wage-increase rates, average inflation in 2001 was lower in Denmark than in the euro area. This is due mainly to the development in food prices. The rate of increase in Danish food prices fell strongly in 2001 after increasing in the first months of the year, whereas euro-area food prices rose in the 1st half-year, followed by a slight decline. The development in energy prices helped to push down inflation in both Denmark and the euro area. Disregarding energy and foodstuffs, prices in Denmark and the euro area increased at equivalent rates in 2001. The pattern of inflation excluding energy and foodstuffs is also reflected in Danmarks Nationalbank's compilation of underlying inflation, which is a measure of domestic market-determined price increases. Underlying inflation has risen since mid-2000, after falling in the preceding period. This may reflect that business enterprises absorb the savings from using cheaper raw materials, whereas previously they refrained from passing on increases in raw materials prices to consumers.
Economic prospectsThe Danish economy achieved dampened, balanced growth in 2001. There were no acute imbalances at the start of 2002. There is a substantial current-account surplus, and unemployment is low. Public finances likewise show a surplus. The weakening of the global economy is not a problem for the Danish economy in the current situation of sustained high capacity utilisation and a tight labour market. If the expected turnaround in Denmark's export markets fails to emerge, increasingly negative effects on the exporting industries are nonetheless unavoidable. Domestic demand has been dampened in recent years. Lower domestic capacity utilisation has made room for exports and favoured the balance of payments, without leading to higher unemployment, cf. Chart 8. During the past two years the development in domestic demand has not varied significantly from development abroad, but particularly favourable net revenues from energy exports and sea freight have contributed to improving the balance of payments.
It is vital that the pressure on the labour market is eased in order to maintain competitiveness. At a high level of activity a stronger influx to the labour market and better utilisation of idle resources are required. A stronger influx to the labour market is also important in view of the demographic trends of an ageing population and a diminishing population of working age. The moderate new influx to the labour market in recent years shows that it is difficult to achieve the objective of increasing the supply of available working hours. The ageing of the population will likewise exert pressure on public finances. It is therefore vital to reduce the government debt further. This requires a surplus on government finances. A sound surplus will also give some leeway for the automatic stabilisers to offset any future cyclical downturn. Footnotes[1] OECD's autumn forecast 2000, Economic Outlook No. 68 and autumn forecast 2001, Economic Outlook No. 70. [2] Congressional Budget Office, January 2002. The US fiscal year 2001 runs from the 4th quarter of 2000 up to and including the 3rd quarter of 2001. [3] Where figures for the whole of 2001 and for 2002 are not available, the OECD's autumn forecast Economic Outlook No. 70, November 2001, is used. [4] OECD's autumn forecast 2000, Economic Outlook No. 68 and autumn forecast 2001, Economic Outlook No. 70. [5] A provisional estimate of Denmarks external debt at end-2001 is published at the end of March 2002.
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Version 1.0 March 2002 Nationalbanken. |
