The international financial markets
In the first part of the period the financial markets were affected by the Iraq crisis. The bond and stock markets mirrored each other closely, and the long-term interest rates and stock prices mostly followed suit. The 10-year yields were generally falling up to the beginning of March, followed by a strong increase in the week before the outbreak of war in Iraq, cf. Chart 1. Since mid-April, long-term interest rates have been falling again. The uncertainty concerning the future development in interest rates was relatively great in March, but diminished in April, cf. Box 1. At the same time, stock-market volatility has been declining since mid-March.
| 10-year yields in Germany, the USA and Japan |
Chart 1
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| Source: EcoWin. | |
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Interest-rate expectations and market uncertainty |
Box 1
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The uncertainty concerning the future interest rates can be expressed as probability distributions based on option prices. A wide distribution is a sign of great uncertainty. Chart 2 shows the distributions for the future 3-month money-market interest rate in the euro area before, during and after the war in Iraq.1 On 7 March, around two weeks before war broke out, the probability distribution was rather wide. This indicates relatively pronounced market uncertainty e.g. due to the still unresolved situation. On 26 March, i.e. around one week after the outbreak of war, the distribution shows almost unchanged uncertainty and a slightly higher average expected future interest rate. On 17 April, after the end of the war, the distribution shows diminishing uncertainty, but an almost unchanged expected level. Throughout the period the distributions were skewed to the left, indicating that the market finds lower interest rates to be more probable than higher interest rates, compared to the current forward rate. Overall, the gradual narrowing of the distributions during the period indicates that the course of the war was generally as expected by the financial markets. However, a small proportion of the narrowing can be attributed to the maturity effect of the diminishing remaining time to maturity on the underlying options during the period. |
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| Probability distributions for future 3-month interest rate |
Chart 2
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| Note: Risk-neutral probabilities calculated on the basis of prices for options (expiring on 17 September 2003) on 3-month money-market interest-rate futures in the euro area. The method is described in Allan Bødskov Andersen and Tom Wagener, Extracting risk neutral probability densities by fitting implied volatility smiles, Danmarks Nationalbank, Working Paper No. 9, 2002. Source: Bloomberg and EcoWin and own calculations. |
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| 1 In the period under review, the ECB held one interest-rate meeting where the Governing Council decided to maintain the official interest rates unchanged. This was in accordance with the expectations of the market participants. | |
Since February the euro has strengthened against the other major currencies. The euro appreciated against the US dollar from approximately 1.07 dollars per euro in mid-February to around 1.15 dollars per euro in mid-May. This appreciation took place in the second half of the period. The Japanese yen fluctuated within the range from 116 yen per dollar to 122 yen per dollar. In mid-May, the yen was at the strong end of this range, which was also the case at the end of February and the beginning of March. In February and March the Bank of Japan intervened in the foreign-exchange market on behalf of the Ministry of Finance in order to counteract the yen's strengthening.
German and US 10-year yields were generally on a par in mid-February. During the following weeks the long-term US yield fell more than the German yield, and by the end of February the yield differential was approximately 20 basis points. During the period the long-term US yield fell by around 0.4 per cent to 3.52 per cent, while the long-term German yield was 3.90 per cent in mid-May, corresponding to a small decrease from the February level. However, since the beginning of March the long-term yields in Germany and the USA have mirrored each other relatively closely. In mid-May, the 10-year Japanese yield had fallen further to a mere 0.58 per cent.
Since February, the US S&P500 stock index has risen by approximately 13 per cent, while the European Dow Jones Stoxx 600 index has only increased by approximately 5 per cent. The Japanese stock market showed negative development, and the Nikkei index fell by approximately 4 per cent.
The official interest rates in the euro area were lowered by 25 basis points on 6 March, while the official interest rates in the USA and Japan have been unchanged, cf. Chart 3. Interest rates in the money market have fluctuated only slightly, and in mid-May the 3-month money-market interest rates were still close to the official interest rates.
| Official interest rates in the euro area, the USA and Japan |
Chart 3
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The oil price (Brent) peaked at 35 dollars per barrel at the beginning of March, and had fallen to 27 dollars by mid-May, cf. Chart 4. The development in the oil price has been influenced by supply factors, including a strike in Venezuela, unrest in Nigeria, and the war in Iraq. The world market price of gold denominated in dollars fell in February and March, but in mid-May it had returned to the level from mid-February. The latest increase in the price of gold should also be viewed in the light of the dollar's weakening, however. Denominated in euro, the gold price in mid-May was approximately 6 per cent lower than in mid-February. The falling prices for oil and gold may also reflect that the uncertainty in the financial markets declined somewhat in the last part of the period.
| Oil price (brent) and gold price |
Chart 4
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| Source: EcoWin. | |
Since March the Swiss franc, which is traditionally used as a "safe-haven" currency in times of uncertainty, has depreciated against the euro. The background is that on 6 March Schweizerische Nationalbank reduced the target for the 3-month money-market interest rate by 50 basis points to a mere 0.25 per cent.
The international economy
USA
The US economy showed moderate growth in the 1st quarter, and there is still no actual upswing. GDP was 0.4 per cent higher in the 1st quarter of 2003 than in the 4th quarter of 2002. Private consumption made a positive contribution to growth, even though the rate of increase has subsided during the last quarters. The prolonged decline in investments was reversed to an increase at the end of 2002, but in the 1st quarter of 2003 investments were by and large unchanged. Both imports and exports were lower in the 1st quarter of 2003 than in the preceding quarter. Since imports accounted for the strongest decrease, the trade deficit was reduced a little. One of the reasons for the reduced foreign trade deficit may be the dollar's weakening vis-à-vis especially the euro in 2002.
The moderate growth is also reflected in the falling industrial production in March and April, and in the labour market. The downturn in employment in the 1st quarter continued in April, when unemployment rose to 6 per cent.
Consumer prices rose by 2.2 per cent in April, while core inflation, which has been decreasing since the end of 2001, rose by only 1.5 per cent. The risk of deflation, i.e. a sustained decrease in the general price level, cf. Box 2, is found to be limited.
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Deflation |
Box 2
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The USA and Germany have seen dampened economic growth in recent years, as well as low inflation, cf. Chart 5. Looking forward, it is uncertain whether growth will increase, which has led to a discussion of the possible risk of deflation, i.e. a general sustained decrease in prices. This risk is emphasised by the development in Japan where prices are on the decrease for the fourth consecutive year. The background to deflation in Japan is ten years of low growth and structural problems, but also the strong decline in property and stock prices prior to the period of low growth. The USA and Germany have experienced similar stock-price drops in recent years. The courses of prices and output are interrelated. When total output exceeds the potential in the economy, inflation tends to rise. On the other hand, inflation tends to fall when output and demand are below the potential. If this applies for a longer period, it may cause prices to actually decrease, i.e. deflation. However, price drops do not necessarily only reflect low output and demand, but may also be attributable to the fact that productivity gains in certain sectors lead to price drops over a certain period. The development in the IT sector is a case in point. When prices begin to exhibit a general sustained decrease, certain mechanisms will pull prices further down, which may threaten financial stability. Sustained price drops entail an incentive to postpone consumption, since a given amount will buy more in the future than at present. Furthermore, price and wage decreases aggravate the loan burden, since households and business enterprises will find it more difficult to repay given nominal loans. The incentive to postpone consumption as well as the increased real debt burden may cause demand to decrease further. The result may be a spiralling reinforcement of the debt burden and deflation. A policy of stabilisation, including monetary policy, is normally the way to tackle an economic downturn. In conventional monetary policy, a reduction of the policy interest rate leads to a lower real interest rate, which has an expansionary effect on the economy. In the event of deflation, the real interest rate is positive, even when interest rates are zero. In other words, a situation may arise where a lower real interest rate is desirable, but not possible, since it is impossible to reduce the official interest rate any further. This lands the economy in a liquidity trap. The Federal Reserve has analysed the problem, and announced that it is possible to amend the central bank's operations in order to maintain the efficiency of monetary policy, even if the overnight interest rate were to fall to zero. |
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| Inflation and core inflation in the USA and Germany |
Chart 5
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| Note: Core inflation is the year-on-year increase in the consumer price index excluding energy and food. Source: EcoWin and Eurostat. |
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In the USA, monetary policy is still expansionary via a negative real interest rate. Since November 2002 the Federal Reserve has maintained its benchmark interest rate (the federal funds target rate) at 1.25 per cent. US fiscal policy is also expansionary. The OECD estimates the government deficit to be 3.4 per cent of GDP in 2002 and expects it to rise to more than 4 per cent in 2003 and the year after, cf. Chart 6. Should the sustainability of fiscal policy be subject to doubt, the government deficit's stimulating effect on the economy may, in a future-oriented perspective, be restricted by offsetting development in private-sector savings. Furthermore, the overall US fiscal policy may be affected by the individual states in future being forced to improve their budgetary position. The need for tightening is the result of a strong decrease in the states' reserves in recent years.
| Triple deficits in the USA |
Chart 6
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| Note: The data for 2002-04 is estimates. | |
| Source: OECD. | |
Despite increased savings in the private sector in 2002, the sector's investments still exceeded its savings. A deficit on the savings balances of both the private and public sectors entails a large deficit on the external savings balance, cf. Chart 6. The triple deficits show that there are still imbalances in the US economy.
Hourly productivity rose by 4.8 per cent in 2002, but the increase should be viewed against the background of the weak development in most of 2001, when output fell without a corresponding decrease in the hours worked, cf. Chart 7. The necessary downward adjustment of labour input took place in 2002 when output again rose. After the adjustment, productivity growth is back on track at the annual rate of around 2.5 per cent seen in the period 1996-2000. Since employment seems to be adjusted to the current output level, a new upturn with rising output is expected to lead to growth in employment.
| Productivity and growth in output and hours worked in the USA |
Chart 7
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| Source: EcoWin. | |
The spring forecasts of the international organisations are relatively positive. The OECD, the IMF and the European Commission estimate growth in 2003 to be in line with the growth rate of 2.4 per cent in 2002. In 2004, the OECD and the IMF expect a growth rate of just below 4 per cent, while the European Commission's estimate of 2.5 per cent is somewhat lower. After a weak 1st half of 2003, the OECD and the IMF expect rising investments to be the force driving increasing growth in the 2nd half-year. However, the confidence indicators paint a rather pessimistic picture of the economic development. Consumer confidence was very low again in April, and business confidence has fallen back to a level that indicates falling industrial production.
The euro area
In the euro area, output rose by 0.1 per cent in the 4th quarter of 2002 and growth for the overall year was a modest 0.8 per cent. The principal forces driving growth in the 4th quarter were private and public consumption, while exports decreased a little, and investments were unchanged. Unemployment continued to increase into 2003, and was 8.7 per cent in March.
In April, consumer prices rose by 2.1 per cent, and inflation excluding energy and food was 2.0 per cent in that month, cf. Chart 8. The decrease in core inflation over the past year should be viewed in the light of the weak real economic development and the euro's strengthening against especially the dollar. Price increases at restaurants, cafés, etc. were particularly strong in 2002, but have in recent months dropped back to the level from before the introduction of euro banknotes and coins.
| Inflation in the euro area |
Chart 8
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| Source: Eurostat and EcoWin. | |
The assessment of the Governing Council of the European Central Bank at its meeting at the beginning of March was that the outlook for price stability had improved. The Governing Council therefore reduced the official interest rates by 0.25 per cent. This brought the minimum bid rate to 2.50 per cent.
At the EU summit in March, the heads of state and of government adopted the ECB's proposal for amendment of the voting modalities of the Governing Council.[1] However, the proposal will enter into force at the earliest when the number of euro area member states exceeds 15.
After four years of conducting monetary policy in the euro area the Governing Council evaluated the monetary-policy strategy. The result of the review was published on 8 May, cf. Box 3.
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The governing council's evaluation of the ecb's monetary-policy strategy
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Box 3
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After the evaluation of the monetary-policy strategy the Governing Council confirmed the definition of price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2 per cent. Price stability is to be maintained over the medium term. In the pursuit of price stability the Governing Council will aim to maintain the inflation rate close to 2 per cent over the medium term. This clarification ensures an adequate safety margin to guard against the risks of deflation. Monetary-policy decisions will continue to be based on a comprehensive analysis of the risks to price stability. In order to clarify communication of the cross-checking of information used in the overall assessment, the introductory statement of the President at the monthly press conference will henceforth adhere to a new structure. It will start with the economic analysis to identify short- to medium-term risks to price stability. This will be followed by the monetary analysis in order to assess medium to long-term trends in inflation. The new structure of the introductory statement will better illustrate how these two perspectives offer complimentary analytical frameworks. In this respect, the monetary analysis mainly serves as a means of cross-checking – from a medium to long-term perspective – the short- to medium-term indications coming from the economic analysis. As a result of the longer-term nature of the reference value for monetary growth as a benchmark for the assessment of monetary developments, the Governing Council will no longer fix the reference value on an annual basis. However, it will continue to assess the underlying conditions and assumptions. |
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In 2002 the euro area's government deficit rose to 2.2 per cent of GDP from 1.6 per cent in 2001. The deterioration can be attributed primarily to the weak cyclical development, but also to an increase in the structural deficit, cf. Chart 9.[2] The increase in the structural deficit is especially attributable to Germany and France. In countries with large structural deficits fiscal policy is more expansionary than the objective set out in the Stability and Growth Pact of government budgets close to balance or in surplus in the medium term. The relaxation of fiscal policy during the latest upswing implies that there is now no scope for allowing the automatic stabilisers to work freely.
| Cyclically-adjusted budget balances in the euro area |
Chart 9
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| Note: Data for Luxembourg is not available. | |
| Source: European Commission, spring forecast 2003. | |
In the 4th quarter of 2002 the balance of payments of the euro area still showed a small surplus of 1.3 per cent of GDP. The private savings surplus exceeded the government deficit.
The growth prospects for the euro area were adjusted downwards in the latest forecasts from the OECD, the IMF and the European Commission. GDP growth is now expected to be just over 1 per cent in 2003. The confidence indicators do not point to any significant changes in the economic situation in the near future. The European Commission's business confidence indicator fell a little further in April, but the level has been almost unchanged over the past year. Consumer confidence was still low in April after a small increase following on a prolonged decline.
The German economy is still weak, and overall growth for 2002 was only 0.2 per cent. In the 1st quarter of 2003, GDP fell by 0.2 per cent against the previous quarter. The harmonised unemployment rate rose to 9.4 per cent of the labour force in April, and HICP inflation was 1.0 per cent in the same month, which was around 1 per cent below the euro-area average. However, there is no immediate danger of Germany's economy deteriorating to such a degree that deflation is the result, cf. Box 2.
In April, the European Commission expected the government deficit and the government debt in 2003 to exceed the EU treaty's limits of respectively 3 per cent and 60 per cent of GDP as was the case in 2002.
At the beginning of March the Bundesbank published the report "Wege aus der Krise" on the current economic crisis in Germany and the necessity of structural reforms.[3] According to the Bundesbank, more satisfactory economic development requires an overall reform, including a reduction of indirect labour costs, stronger incentives to work, compliance with the requirements set out in the Stability and Growth Pact concerning a government budget close to balance in 2006, and resolution of problems related to the demographic development.
One week later, the German government announced its plan for reform of the labour market, the health sector and the pension area.[4] Although the proposals submitted are hardly sufficient to solve Germany's structural problems, the dawning understanding of the problems is a positive sign. The proposals are now to be considered by the Bundestag and the Bundesrat, and have been criticised by especially the trade unions.
Growth in the French economy diminished throughout 2002, and GDP fell by 0.1 per cent from the 3rd to the 4th quarter. Expansion of government consumption was the most important positive contribution to growth, while investments fell. The government deficit increased to 3.1 per cent of GDP in 2002, and the European Commission has therefore initiated the excessive deficit procedure set out in the Stability and Growth Pact. In order to reduce the deficit, the French government has postponed a previously announced tax cut, but the government nevertheless expects the deficit to increase to 3.4 per cent in 2003.
Japan
The Japanese economy performed better than expected in 2002. Growth in the 4th quarter was 0.5 per cent on the previous quarter. Exports made the main contribution to growth, although domestic demand was also rising.
However, the structural problems in the financial sector and on the labour market remain unresolved. At the same time, the traditional stabil-isation-policy instruments have already been fully utilised, since the short-term interest rate is zero, and the government debt increased to 140 per cent of GDP in 2002, according to the latest OECD assessment.
As a measure to ensure financial stability, since the autumn of 2002 the Bank of Japan has bought stocks from the commercial banks in order to induce these banks to reduce their market risks. On 25 March the Bank of Japan announced that the limit for buying stocks from the banks would be increased by 50 per cent to 3,000 billion yen, corresponding to more than 1 per cent of the value of the Japanese stock market. After the monetary-policy meeting at the end of April the target for the banks' deposits with the central bank was raised from 17-22 trillion yen to 22-27 trillion yen. The Bank of Japan thus continued to pursue a policy aimed at ensuring ample liquidity in order to maintain stability in Japan's financial markets.
UK
The quarter-on-quarter growth in the UK economy has declined, and was 0.2 per cent in the first quarter of 2003. The strong growth in housing prices has subsided a little lately. Inflation excluding interest rates and indirect taxes has been rising since last summer, reaching 3.0 per cent in March, which is 0.5 per cent above the inflation target.
From mid-February until mid-May the pound sterling weakened by approximately 6 per cent against the euro. However, in trade-weighted terms, the weakening is somewhat smaller, since the sterling/dollar exchange rate is by and large unchanged. Sterling's depreciation may lead to higher prices for imported goods in the coming months, and thereby contributes to sustaining inflation, even if the domestic inflationary pressure diminishes.
At the beginning of February, the Bank of England lowered its benchmark interest rate by 25 basis points to 3.75 per cent. The Monetary Policy Committee found the prospects for demand to have weakened, leading to a risk of future inflation lagging behind the inflation target.
The government plans for considerable expansion of government spending in the coming years, including higher government investments in the health, education and transport sectors. As a result of the increased government spending, the Treasury expects the government deficit to increase to 2.4 per cent of GDP in the 2003-04 fiscal year. This estimate is based on an optimistic growth assumption of 2 per cent in 2003, and 2.25 per cent in 2003-04. It therefore cannot be ruled out that the deficit will approach the Treaty's limit of 3 per cent.
Sweden and Norway
The most recent economic development courses of these two Scandinavian countries have several characteristics in common. The international slowdown pushed down exports in the 2nd half of 2002, but growth was supported by private and public consumption. In Sweden, GDP growth was 0.3 per cent from the 3rd quarter to the 4th quarter, while growth in the same period was 0.2 per cent in Norway. After considerable increases as a consequence of strong electricity and oil price rises around the turn of the year inflation has been on a downward trend in both countries since February.
In Norway, inflation was kept down by the strong Norwegian krone until the turn of the year. In January, the Norwegian krone weakened, and this weakening continued on the announcement by Norges Bank at the end of February of a gradual relaxation of monetary policy in the immediate future. Norges Bank accordingly lowered its official interest rate by 50 basis points in both March and April to 5 per cent. In April, Norges Bank considered it more possible that inflation would be below than above the target of 2.5 per cent two years ahead. However, looking forward, the Norwegian krone's weakening by approximately 8 per cent against the euro since the turn of the year is expected to entail higher imported inflation.
Sveriges Riksbank also relaxed monetary policy in March when the benchmark interest rate was cut by 25 basis point to 3.5 per cent.
Canada
The subdued growth in the USA, and the resulting weaker Canadian exports, contributed to dampening economic growth in Canada at the end of 2002. However, domestic demand continued to show robust development, and employment has continued to rise. Since October 2002, inflation has exceeded the upper limit of 3 per cent in the fluctuation band around the inflation target of 2 per cent. Against this background, the Bank of Canada raised the official interest rates by 25 basis points in March, and again in April. This brought the Bank of Canada's target for the benchmark overnight interest rate to 3.25 per cent.
Development in the danish financial markets
The krone remains stable against the euro at a level a little stronger than the central rate of kr. 7.46 per euro. The krone has tended to strengthen in certain periods, and on a few occasions Danmarks Nationalbank bought currency in the market in order to stabilise the krone against the euro.
Interest rates in Denmark have closely matched interest rates in the euro area. On 6 March, Danmarks Nationalbank lowered the official interest rates by 25 basis points after the ECB had lowered its interest rates by the same amount earlier on the same day. In mid-May the spreads between Danish interest rates for longer maturities and equivalent interest rates in the euro area were also at the level from mid-February. The Danish 3-month money-market interest rate was 2.56 per cent in mid-May, which was 15 basis points above the corresponding euro-area interest rate. The spread between Danish and German 10-year yields was a little wider at 25 basis points.
The interest rates in the financial markets declined up to mid-March, but then rose. In mid-May, the 10-year yield was 4.15 per cent, which is a little lower than in mid-February. The level of interest rates is thus still low, and the financial conditions are expansionary.
Lending to private individuals by banks and mortgage-credit institutes rose by 9.5 per cent in March from one year before, cf. Chart 10. After a small decrease at the end of 2002 the growth in borrowing by private individuals has been on the increase in 2003. This was attributable to an expansion of lending by mortgage-credit institutes. At the same time, the growth in lending from banks and mortgage-credit institutes to the self-employed and to business enterprises has also begun to rise. In March, the year-on-year growth in lending to these sectors was between 4 and 5 per cent.
| Lending by banks and mortgage-credit institutes to selected sectors |
Chart 10
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| Note: Excluding lending by the banks' foreign units. | |
| Source: Danmarks Nationalbank. | |
The extraordinary redemptions of mortgage-credit bonds as of the April settlement date totalled kr. 116 billion, a record-high level. The associated payments were effected on the first banking day in April, coinciding with large turn-of-the-month payments. In order to facilitate the exchange of liquidity between banks and mortgage-credit institutes, Danmarks Nationalbank had announced beforehand that there would be access to purchase and sell certificates of deposit on 1 April. However, a considerable share of the liquidity was exchanged directly between the banks and mortgage-credit institutes through trading of certificates of deposit.
In recent months, trading of certificates of deposit among the banks and mortgage-credit institutes has been more extensive than before, cf. Chart 11. In so far as it is a permanent shift, this makes a positive contribution to a well-functioning money market.
| Trading in certificates of deposit among banks and mortgage-credit institutes |
Chart 11
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| Source: Danmarks Nationalbank. | |
The KFX index of the 20 most traded Danish stocks was 13 per cent higher in mid-May than in mid-February. Danish stock prices developed along roughly the same lines as the international stock markets, i.e. prices fell up to mid-March, and have since been on the increase.
In mid-March, Danske Bank was faced with considerable IT problems, which e.g. prevented the bank from participating fully in the settlement of payments. The systems, including the Sumclearing and VP settlement, proved able to handle the partial non-participation of a major player for several days, although there were none of the large-value payments which e.g. occur at the turn of the month.[5] On 12 March Danmarks Nationalbank gave access to repurchase certificates of deposit via the money-market broker in order to ensure sufficient liquidity in the sector. Liquidity amounting to kr. 5 billion was hereby contributed. This episode had a limited impact on the short-term money-market interest rates.
On 30 April 2003, the Minister for Economic Affairs and Business submitted a bill for amendment of the Act on Certain Means of Payment. The existing Act has prevented the banks from imposing the costs of operating a payment system on the payment recipients, i.e. retail outlets in physical trade. [6]
The core element of the bill is that as from 1 January 2005 the banks may charge shops a fee of up to kr. 0.50 per transaction in the case of payment using a Dankort with a so-called EMV chip. As from 1 January 2010, the fee imposed on the shops may amount to up to half the costs of operating the Dankort system.
All existing Dankort payment cards have magnetic strips. One of the intentions behind the bill is thus for the Dankort in future to be provided with a chip. A chip-based card is safer to use, and also allows for multi-functionality. In this connection, the Danish Bankers Association intends to encourage all its members to commit themselves to offering a modern chip-based Dankort.
The bill furthermore enables the banks to offer a Dankort with balance control for 15-17-year-olds. The shops may be charged a fee of up to kr. 0.75 per transaction for this card.
The shops may opt to pass on the fees to consumers. However, the fees may not exceed those paid by the shops to the banks. The bill does not change the banks' access to charge their customers for the issue and administration of the Dankort. For all shops, the first 5,000 Dankort transactions per year are free of charge.
International payment cards issued in Denmark will still be subject to the Act on Certain Means of Payment. However, the innovative aspect is the distinction drawn between debit and credit cards. As regards residents' use of international debit cards issued in Denmark, e.g. VISA Electron, as from 1 January 2005 the issuers may charge up to 0.4 per cent of the transaction amount from the shops, subject to a maximum of kr. 4. Under the current provision, 0.75 per cent of the transaction amount may be charged without limitation. For residents' use of international credit cards issued in Denmark, e.g. Eurocard and Mastercard, the bill entails no changes, so that the shops may still be charged up to 0.75 per cent of the transaction amount.
Every second year, the Minister for Economic Affairs and Business must submit a report to the Folketing (Parliament) on the conditions on the payment-card market.
Since Danish banks will in future be closed on 31 December (New Year's Eve), Danmarks Nationalbank will also be closed. On that date, Danmarks Nationalbank will therefore not set exchange rates and reference interest rates, but the Danish part of the pan-European payment system, TARGET, will still be open.
The danish economy
According to the latest national accounts, growth in the Danisheconomy declined during 2002. In 4th quarter of 2002, GDP was thus unchanged from the previous quarter, while for 2002 overall, the rate of growth was 1.6 per cent. Private consumption made a positive contribution to growth throughout 2002, and the available indicators point to continued growth in private consumption at the beginning of 2003. Retail sales in January and February were 2.3 per cent above the two preceding months, and 5.3 per cent higher than in the previous year, cf. Chart 12. On the other hand, new car sales have decreased in 2003, but the decline may be attributed to e.g. timing shifts in demand as a consequence of expectations that prices or indirect taxes will change.
| Retail sales |
Chart 12
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| Sourcee: Statistics Denmark. | |
In seasonally-adjusted terms, exports of goods and services in constant prices fell by 0.8 per cent in the 4th quarter. This should be viewed in the light of the weak cyclical situation of Denmark's trading-partner countries. Imports also declined, making the overall impact on the balance of payments moderate. The trade surplus was still high at the beginning of 2003. The exceptionally strong exports of goods were attributable particularly to the energy sector where exports of oil and electricity were high in view of the favourable price development. During the 12 months up to March 2003 there was still a considerable current-account surplus of kr. 41 billion.
The latest compilation of Denmark's external debt shows that the debt had fallen to kr. 250 billion at end-2002, corresponding to 18 per cent of GDP. Besides the current-account surplus the reduction of the debt in the 4th quarter of 2002 can be attributed to positive net value adjustments of kr. 12 billion.
Unemployment has been rising in recent months, and was 5.8 per cent in March. Since the low one year previously seasonally-adjusted unemployment has increased by 0.8 percentage points. The harmonised unemployment statistics show that unemployment in Denmark began to rise around six months later than unemployment in the euro area, cf. Chart 13. The two unemployment rates have otherwise taken an almost identical course, and the spread of almost 4 percentage points still applies.
| Harmonised unemployment |
Chart 13
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| Note: Seasonally-adjusted data. | |
| Source: Eurostat | |
The labour market has been very tight in recent years, but has eased a little in step with rising unemployment. Since 1996, wage increases in Denmark have been higher than in the euro area due to the relatively strong demand for labour. According to the wage statistics of the Danish Employers' Confederation the annual increase in wages within the Confederation's area was 4.3 per cent in the 4th quarter of 2002. This means that rising unemployment is not yet reflected in the wage statistics.
Consumer prices rose by 2.5 per cent in April against the same month of 2002, cf. Chart 14. Based on the Harmonised Index of Consumer Prices, HICP, since the summer of 2002 inflation in Denmark has been a little higher than in the euro area. The development in the consumer-price index has been affected by the volatile energy prices. Fluctuating oil prices also affect natural gas prices, since the consumer price for natural gas in Denmark is adjusted on the basis of the price of heating oil. The significance of oil prices to the Danish economy is considered further in Box 4.
| Inflation in Denmark |
Chart 14
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| Source: Statistics Denmark and Eurostat. | |
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The significance of oil prices to the danish economy
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Box 4
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Oil prices have been very volatile in recent months. From around 24 dollars per barrel in November, oil prices rose up to the commencement of the war in Iraq in March to just under 35 dollars per barrel, and have since decreased again to approximately 25 dollars per barrel, cf. Chart 15. Since the beginning of 2002, oil prices denominated in dollars have generally increased, but from a Danish perspective the effects were reduced by the US dollar's weakening in the same period. The Danish economy is today less vulnerable to oil-price developments than during the two oil crises in 1973/74 and 1979/80. This is especially due to the development of new sources of energy, a lower energy content in output, and reduced energy consumption for e.g. heating of homes. Thanks to the increased extraction of oil and gas in the North Sea Denmark has moved from being a net importer to a net exporter of oil products. Approximately 60 per cent of the oil and gas production is undertaken by non-resident business enterprises, so a considerable proportion of the sector's earnings is transferred to abroad. This reduces the impact of an oil-price change on the balance of payments. Oil prices have a direct impact on the households' economy in terms of heating of homes, as well as transport. In relation to the consumer price index the overall weight of energy prices is just over 10 per cent, distributed on the two items. However, VAT and energy taxes account for the largest share. Energy taxes consist of a fixed-unit tax, and an increase in the producer price of energy by e.g. 10 per cent has an impact of only just under 5 per cent on the consumer price. In general, the price of crude oil shows considerably larger fluctuations than e.g. net prices, cf. Chart 15. In addition, the indirect effect of the price for other products attributable to an increase in business enterprises' costs also plays a role. The overall effect of an oil-price increase by 10 per cent will probably constitute less than 1 per cent of the households' consumer spending. Model simulations show that an oil-price increase of 5 dollars per barrel will 1-2 years ahead result in a moderate decrease in GDP of approximately 0.2 per cent, and an improvement of the balance of payments by kr. 2-4 billion. |
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| Prices for crude oil and energy in Denmark |
Chart 15
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| Source: Bloomberg and Statistics Denmark. | |
Denmark's economic situation at the beginning of 2003 was thus characterised by diverging trends. The low interest rates and conversions of mortgage-credit loans contribute to sustained growth in private consumption. In other areas the signals were more blurred, and the international economic situation has deteriorated. Nevertheless, private consumption makes a significant contribution to overall demand, and buoys up the economy. This indicates some growth in the Danish economy, albeit more moderate than for the many years of falling unemployment. The slight weakening thus follows a prolonged period with a risk of the labour market overheating, and of wage and price increases exceeding those of the euro area. Fiscal policy eases the consequences of a downturn in growth via the automatic stabilisers. Higher expenditure on unemployment benefits and lower tax revenues are examples of effects that help to automatically stabilise the cyclical development. Changing the fiscal-policy stance is inappropriate, as it risks pushing public finances away from the necessary medium-term consolidation.
The government and the Danish People's Party have reached agreement on tax cuts as from 2004. The agreement e.g. entails raising the basic intermediate tax allowance over a four-year period, and an employment-related tax deduction of 2.5 per cent of the part of earned income lying below the intermediate tax threshold. The agreement is based on real growth in government spending not exceeding 0.7 per cent in 2004 and 0.5 per cent annually in the period from 2005 to 2010. This target is ambitious, but not unattainable, in view of the development in government spending over a number of years. Over the last ten years, average real growth in government spending was 2.3 per cent, but had fallen to 1.0 per cent in 2002.
[1] The proposal is described in further detail in Danmarks Nationalbank, Report and Accounts 2002, p. 75 ff.
[2] Structural budget balances (cyclically adjusted budget balances) are an attempt to measure the structural part of fiscal policy, i.e. the budget balance adjusted for cyclical effects. A description and discussion of the methods used by the European Commission and other international organisations to calculate structural budget balances, and of the problems associated with these calculations, are found in Allan Bødskov Andersen, Cyclically Adjusted Government Budget Balances, Danmarks Nationalbank, Monetary Review, 3rd Quarter 2002.
[3] Hans-Werner Sinn's article "The Laggard of Europe" from November 2002 is another example of an analysis of Germany's structural problems. The article is printed in CESifo Forum, Volume 4, Special Issue No. 1, Spring 2003, and is available at www.cesifo.de.
[4] The reform proposals were accompanied by proposals for subsidised loans to local governments and the construction sector totalling 15 billion euro, and subsidies for local-government investments amounting to 2 billion euro.
[5] The systemic risks in the Danish payment systems are analysed on an ongoing basis by Danmarks Nationalbank. Danmarks Nationalbank's publication Financial Stability 2002 presented a number of simulations of crisis scenarios in e.g. the Sumclearing. The results showed that the Sumclearing can without problems handle the lapse of the largest single debtor for one day.
[6] The revision of the existing Act on Payment Cards in 1999 made it possible to charge fees from the payment recipient on the use of the Dankort payment card in non-physical trade, i.e. on the Internet.