Real-Economic Development
The international economy
The euro area was characterised by sluggish growth in 2003. Outside the euro area, however, growth picked up in 2003 after weak development in 2001 and 2002. The upswing is clearly visible in e.g. the USA and many Asian countries, notably China. This is reflected in the international stock markets, where recent years' slowdown turned into a more positive trend at the beginning of 2003. The prices of a number of commodities have also increased significantly over the past year. In the bond markets the trend reversed in mid-2003, from falling to rising yields. Yields declined again from the end of 2003, but then increased rapidly from late March, and by mid-April bond yields were back at the level seen before the turn of the year.
The upswing in the USA is driven by expansionary economic policy. This has led to considerable deterioration of the government budgets and a significant weakening of the dollar until February, followed by a slight strengthening. By mid-April the dollar had weakened by approximately 25 per cent vis-à-vis the euro since 2001. Several Asian countries, notably China and Japan, have intervened in the foreign-exchange markets to follow the US dollar. The euro has thus strengthened markedly, and this has exerted pressure on European exports.
The danish economy
In Denmark, GDP increased by just under ½ per cent from 2002 to 2003. This is the weakest economic development since the zero growth in 1993. According to the latest national-accounts figures, growth was also modest in 2002. This confirms the slowdown in the labour market in the past two years, with lower employment and higher unemployment, cf. Chart 1, comparing the development in Denmark to that in Germany and the euro area.
The sluggish growth in the European economy affected Denmark via stagnating exports. However, domestic demand increased, particularly in the 2nd half of 2003 when private consumption alone rose by more than 2¼ per cent.
| GDP and employment in Denmark, Germany and the euro area, 1991-2003 |
Chart 1
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It is generally believed that the positive trend in domestic demand will continue in 2004, and according to the most recent forecasts GDP growth is expected to be around 2 per cent, cf. Table 1.
Private consumption increased significantly in the 2nd half of 2003 following 4-5 stagnant years, cf. Chart 2, and was thus the key positive factor contributing to overall economic activity. The estimated growth in consumption is around 3 per cent in 2004 and slightly lower in 2005, which is more or less in line with the growth in the households' disposable real income. Retail turnover increased considerably during 2003, and in the first two months of 2004 it was almost 4 per cent higher than in the same period of the preceding year. Car sales are also picking up after the trough in the spring of 2003. Consumption is stimulated by sizeable tax cuts in 2004, including the government's spring package, and by favourable financial conditions, in the form of a low level of interest rates and new mortgage-credit products with low payments in the first years. The increase in unemployment is, however, a risk factor pulling in the opposite direction. A high savings ratio in recent years is a good foundation for growth in consumption, but the savings ratio is scarcely likely to return to the level seen in the latter half of the 1990s.
| Private consumption and consumer confidence, 1990-2004 |
Chart 2
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Residential construction increased somewhat during 2003. Total construction activity has improved slightly over the past year, but not sufficiently to offset the downturn in 2001 and 2002. A large part of residential construction can be attributed to the package of housing measures adopted in 2002. The government's new fiscal-policy initiative will also contribute to stimulating residential construction. The housing market remains strong with no indications of falling turnover, cf. the figures from the Association of Danish Mortgage Banks. House prices accelerated in 2003 and are now again rising faster than the general level of prices. In view of the higher incomes, the low level of interest rates and the rising house prices, building new houses will continue to be attractive for a while yet.
Business investments declined slightly in 2003. The strongest decline was seen in construction investments, which fell considerably in 2002 and 2003 following a significant increase in the building stock in the preceding years. Investments in plant and equipment have remained at a high level after a strong increase for several years. Combined with the weakening of the labour market, this points to substitution of machinery for labour in recent years. Business confidence indicators have developed positively over the past year, but are still generally at a low level, and in the latest forecasts total business investments are expected to grow only moderately in 2004.
Danish exports developed weakly in 2003 and were more or less unchanged compared to 2002; manufactured exports even fell. This is a clear indication that the international slowdown also hit Denmark. In addition, competitiveness deteriorated as a result of the significant weakening of the US dollar and higher wage increases than abroad. The latter were, however, to some extent offset by higher productivity increases in Denmark.
The labour market reacted relatively strongly to the modest growth in 2002 and 2003, and employment developed more weakly than in the euro area, cf. Chart 1. However, unemployment is still at a low level in an international perspective, and wage increases are still higher than abroad in spite of the rising unemployment. The decline in private employment shows that companies have adjusted costs to the lower growth in activity and the reduced competitiveness.
HICP inflation fell throughout 2003 from almost 3 per cent at the start of the year to less than 1 per cent in the first quarter of 2004, while euro area HICP was stable at around 2 per cent in the same period. The decrease in inflation is, inter alia, attributable to lower indirect taxes and lower price increases for energy and food. If the latter two categories are excluded, the increase in consumer prices still exceeds that of the euro area.
Even though exports weakened, recent figures show that the current-account surplus in 2003 was higher than ever. The surplus on the government budget balance was more or less maintained in 2003 in spite of the weak level of activity, and the private-sector savings surplus increased. Unemployment remains low, and the significant increases in property prices can be attributed to e.g. the households' disposable income and the development in interest rates. Overall, the imbalances in the Danish economy are thus moderate.