| Release of us labour-market reports and the yield on 10-year government bonds |
Chart 1
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| Note: Vertical lines indicate the day when labour-market reports were published. | |
| Source: EcoWin. | |
Commodity prices are still going up. Non-oil commodities began to rise in mid-2003 in response to the improved international economic prospects, and in May the IMF Non-Fuel Commodity Price Index was at the highest level seen since 1997. The oil price went up from May 2003, inter alia as a result of growing demand for oil all over the world, notably in China, and in mid-May 2004 it was close to 40 dollars per barrel (Brent), the highest price since 2000, cf. Chart 2. The high oil price was supported by modest oil stocks in the USA, continued build-up of the USA's Strategic Petroleum Reserve, and an attempt to limit the supply of oil by reducing OPEC's production target. Further increases in commodity prices may dampen the economic upswing.
| Commodity prices |
Chart 2
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| Source: EcoWin. | |
The communiqué from the G7 meeting in Boca Raton, USA, in February stated that excess volatility and disorderly movements in exchange rates are undesirable for economic growth. After the meeting the dollar ceased to depreciate vis-à-vis the euro and the yen. The exchange rate at the time was just over 1.29 dollars per euro and 0.95 dollars per 100 yen, equivalent to 105 yen per dollar. Subsequently the dollar appreciated against both currencies until mid-May, interrupted by a temporary fall vis-à-vis the yen in April, however, cf. Chart 3. Since mid-March the Bank of Japan has not intervened in the foreign-exchange market to prevent the yen from strengthening.
| Dollar vis-à-vis euro and yen |
Chart 3
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| Note: An increase is an appreciation of the dollar. | |
| Source: EcoWin. | |
The international economy
USA
At a rate of 3.1 per cent, the USA saw the highest output growth among the major industrialised countries in 2003, and the upswing in the US economy continued into 2004. In the 1st quarter, GDP in constant prices increased by 1.0 per cent over the 4th quarter of 2003, cf. Chart 4. In the last two quarters growth has to a large extent been driven by private consumption and fixed investments, but increasing exports have also contributed significantly.
| GDP in the USA |
Chart 4
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| Source: EcoWin. | |
The labour-market situation could be decisive for the development in consumption. Employment has been disappointing for a long time since the onset of the upswing, but the March figures were a positive surprise, showing an increase by more than 300,000 persons, and in April employment increased by a further 290,000 persons or so, cf. Chart 5. Higher income and more positive employment expectations may contribute to buoying up private consumption.
| Employment and unemployment in the USA and the euro area |
Chart 5
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| Note: Employment in the USA is excluding agriculture ("non-farm payroll"), seasonally adjusted, calculated on a monthly basis by the Bureau of Labor Statistics. Employment in the euro area is the ECB's quarterly, seasonally adjusted calculation. Unemployment is compiled on a monthly basis by the Bureau of Labor Statistics and Eurostat, respectively. | |
| Source: EcoWin. | |
The US current-account deficit increased further to 4.9 per cent of GDP in 2003, against 4.6 per cent in 2002. Part of the deficit is attributable to a trade deficit vis-à-vis China, particularly since December 2001 when China joined the WTO. However, there are no indications that the falling employment in the US manufacturing sector is a result of production moving to China, cf. Box 1.
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Are the chinese taking jobs away from the americans?
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Box 1
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The trade deficit vis-à-vis China accounts for about one fourth of the total US trade deficit, and 18 per cent of the total deterioration of the US trade balance since 1998 is a result of the growing trade deficit vis-à-vis China. This has spurred a debate as to whether the reason for the falling employment in the US manufacturing sector is that the Chinese are taking jobs away from the Americans. US imports from China have risen considerably in recent years, and the trend is relatively constant unlike the development in the USA's total imports, cf. Chart 6 (left-hand panel). At the beginning of 2000 imports from China constituted 7 per cent of total imports. In 2003 this share had risen to 13 per cent. In general, the goods imported from China are not manufactured in the USA any longer. These are primarily clothes and shoes, toys and office machinery, which only account for a modest proportion of US output, cf. Chart 6 (right-hand panel). This indicates that the increased imports from China have superseded imports from other countries, e.g. other developing countries in Asia, not US output. |
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| Output and imports in the USA |
Chart 6
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| Note: 12-month moving averages (left-hand chart). Chinese export data are for the first five months of 2003, while the US output figures are for 2002 (right-hand chart). | |
| Source: EcoWin and UBS. | |
US inflation is still low, but in early 2004 there were signs that it is rising. Core inflation, i.e. price increases excluding energy and food, rose from a trough of 1.1 per cent year-on-year at the end of 2003 to 1.8 per cent in April. The declining trend seen in the past two years has thus been broken. The total consumer-price index rose by 2.3 per cent year-on-year in April.
The Federal Reserve has not changed the Fed funds target rate since it was lowered in June 2003. In terms of the difference between the long-term interest rate and the monetary-policy interest rate, monetary policy has been increasingly expansionary, cf. Chart 7. The statement from the Federal Open Market Committee, FOMC, after its May meeting prepared the markets for a gradual tightening of monetary policy, cf. Box 2, and the course of the money-market interest rates indicates that the markets expect the Federal Reserve to raise the Fed funds target rate during the summer.
| Monetary-policy interest rate and long-term yield in the USA 1991-2004 |
Chart 7
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| Source: EcoWin. | |
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Excerpts of the press releases from the two latest FOMC meetings
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Box 2
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Excerpt of the press release from the FOMC meeting on 16 March: "The probability of an unwelcome fall in inflation has diminished in recent months and now appears almost equal to that of a rise in inflation. With inflation quite low and resource use slack, the Committee believes that it can be patient in removing its policy accommodation." Excerpt of the press release from the FOMC meeting on 4 May: "….the risks to the goal of price stability have moved into balance. At this juncture, with inflation low and resource use slack, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured." |
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Japan and the rest of Asia
The trend in Japanese output and demand reversed at the beginning of 2002, and in 2003 GDP increased by 2.7 per cent over the preceding year. This was the highest rate seen since 2000. Growth was driven by exports and investments, but towards the end of 2003 private consumption also rose. The upswing continued into 2004. In the 1st quarter of 2004, GDP was 1.4 per cent higher than in the preceding quarter.
Japanese exports in constant prices rose by 10 per cent in 2003. Half of this increase is attributable to exports to China. In constant prices, exports to China rose by 41 per cent and exports to the EU rose by 14 per cent, while exports to the USA fell by 6 per cent in 2003.
In 2003, non-Japan Asia accounted for 25 per cent of global GDP in terms of purchasing-power parity, corresponding to 10 per cent in terms of current exchange rates, and it accounted for 19 per cent of total global trade in goods and services[1].
Growth in output and demand in China, India and the rest of non-Japan Asia in 2003 reached the highest level seen since the crisis in 1996-97. In most countries growth was driven by domestic demand as well as exports and supported by expansionary macroeconomic policies and lower effective exchange rates. China's GDP increased by 9 per cent in 2003, and by almost 10 per cent year-on-year in the 1st quarter of 2004. There were indications of overheating, i.e. overinvestment in some sectors, bottlenecks in others and generally rising inflation, albeit from a low level. In India, GDP rose by 7 per cent in 2003.
The euro area
From mid-2003 there were more marked signs of an upswing in the euro area. GDP rose in both the 3rd and 4th quarters, but in spite of the improvement in the 2nd half of the year, GDP only increased by 0.4 per cent for the year as a whole. While exports were the main factor contributing to growth in the 3rd quarter, the key driver in the 4th quarter was domestic demand, but not private consumption, which remained more or less unchanged. Improved retail sales and consumer confidence at the beginning of 2004 are seen as indications that private consumption is rising, which is a prerequisite of a stronger and more sustained upswing in the euro area. Preliminary figures show an increase in GDP in the 1st quarter of 2004 by 0.6 per cent over the preceding quarter. This is the highest growth rate for several years, cf. Chart 8.
| Euro-area GDP |
Chart 8
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| Source: EcoWin. | |
Contrary to expectations, full-year exports for 2003 remained more or less unchanged, possibly as a result of the strengthening of the euro vis-à-vis the dollar. Economic forecasts for the euro area have been too optimistic for the last three years. An analysis of the OECD's forecasts for 2001-03 shows that the reason is partly that expected exports were overestimated and partly that the investment estimates were on the optimistic side, cf. Box 3.
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Why were the forecasts wrong?
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Box 3
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In the last three years forecasts for the euro area have generally been too optimistic, and downward adjustment has been necessary from time to time. This also applies to the OECD's forecasts, which were close to the consensus estimates for GDP growth in 2001-03. The detailed OECD forecasts make it possible to find out what went wrong. On the basis of the national accounts, the GDP error can be split into contributions from erroneous estimates of the individual demand components. |
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| The OECD's forecast for the euro area 2001-03 |
Chart 9
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The starting point is the OECD's autumn forecast finalised in November of the preceding year. Chart 9 (top) shows that on average the GDP estimate was more than 1 percentage point too optimistic in 2001-03. As the Chart shows, the expected growth contribution from private domestic demand, above all investments, did not materialise. Net exports, on the other hand, were almost as expected. Lower‑than‑expected investments result in lower imports and thus better net exports. The fact that net exports were as expected while investments and imports were lower implies that exports have actually been disappointing. The impact on GDP, imports and domestic demand of lower exports (corresponding to |
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the difference between the OECD's forecast for exports and the actual development in exports), all other things being equal, is calculated using the macroeconomic model NiGEM and shown in Chart 9 (middle). It is seen that lower-than-expected exports not only result in lower GDP growth, but also lower private consumption and investments. If this effect is subtracted from the forecast error, we get the error not attributable to the export error, cf. Chart 9 (bottom). It is seen that the disappointing exports fully explain the GDP error. After adjusting for the export error, fixed investments in particular are still overestimated, but the GDP impact of this error was offset by the lower-than-expected imports, and net exports were therefore estimated at too high a level. |
| Note: Annual averages. Errors are actual less expected, expressed as percentage points. Blue bars indicate errors in growth contributions from demand components. Y=GDP, Cp=private consumption, Co=public consumption, I=fixed investments, L=stockbuilding, X=net exports. Source: OECD, Economic Outlook, various issues and own calculations. |
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During the slowdown in the past three years, the euro-area employment curve has been relatively flat, and unemployment has risen by approximately 0.5 percentage points. In comparison, 2.5 million jobs were lost in the USA, 0.5 million of which have been regained since the beginning of 2004, and unemployment has risen by 2 percentage points, cf. Chart 5. The flat employment curve in the euro area may indicate that owing to e.g. legislation and labour-market structures employment does not react in the same way as in the USA. Business enterprises have retained their employees even though output has stagnated. The impact of an upswing on employment may turn out to be equivalently limited.
In early 2004 unemployment rose in Germany, but remained more or less unchanged in the other major euro area member states. The weak labour market means that the prospects of growth in domestic demand are only moderately positive.
According to the European Commission's spring forecast, the group of euro area member states exceeding the budget-deficit limit of 3 per cent of GDP stipulated in the EU Treaty will be expanded to include France, Greece, the Netherlands, Italy, Portugal and Germany in 2004. A decision by the European Court of Justice concerning the excessive deficit procedure for Germany and France in 2002 is expected in mid-2004[2].
Euro area inflation, measured as the annual growth in HICP, increased to 2.0 per cent in April, cf. Chart 10. Core inflation was 1.9 per cent year-on-year and has been stable at around this level since mid-2003. The ECB aims for inflation below, but close to 2.0 per cent. The ECB has not changed its monetary-policy interest rate since it was lowered in June 2003, and money-market interest rates do not indicate that market participants expect monetary-policy changes in the coming months.
| Inflation in the euro area and Denmark |
Chart 10
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| Note: Indices are the Harmonised Index of Consumer Prices, HICP. | |
| Source: EcoWin. | |
UK
The UK economy performed better than expected towards the end of 2003 with sound growth in all demand components, including exports. Preliminary figures show GDP growth of 0.6 per cent in the 1st quarter of 2004 compared to the preceding quarter.
From mid-April the pound sterling depreciated vis-à-vis the euro, but in mid-May it was nevertheless just over 3.5 per cent higher than at the start of the year. In relation to the dollar, sterling already started to depreciate in mid-February, and in mid-May it had returned to the level at the beginning of the year, while the effective exchange rate was just over 3 per cent higher.
According to the Treasury, the UK exceeded the budget-deficit limit of 3 per cent of GDP stipulated in the EU Treaty in the fiscal year 2003-04.
Inflation in housing prices continues to be high and in April the Halifax index stood 21 per cent higher than a year earlier. On 6 May the Bank of England raised its interest rate by 0.25 per cent to 4.25 per cent with reference to increasing pressure on the economy and thus increasing risk of higher inflation in the future. Inflation in terms of HICP has been on the low side of 1.5 per cent year-on-year in the past year and fell to 1.2 per cent in April. The target is 2 per cent.
In April the Treasury was due to publish an updated assessment of whether the UK meets the British government's five tests for euro area membership, but it was decided to postpone the assessment until next year.
Sweden
GDP growth in Sweden was 1.7 per cent in 2003. The rise in output and demand accelerated towards the end of the year, mainly driven by private consumption. For the full year 2003 exports also rose fairly substantially, at an average of just over 6 per cent in volume terms.
The UND1X consumer-price index excluding energy rose by 0.8 and 0.9 per cent year-on-year in March and April, respectively, against 1.1 per cent in January. Sveriges Riksbank lowered its repo rate by 0.5 per cent to 2.0 per cent on 7 April since there were indications that inflation would otherwise fall below the 2-per-cent target in two years.
Norway
GDP growth in mainland Norway was 0.7 per cent in 2003. Towards the end of the year growth increased in both private consumption and exports of traditional goods excluding oil.
Consumer prices were falling, i.e. inflation was negative, at the beginning of 2004. However, the fall subsided in March, and in April prices were 0.4 per cent higher than in the preceding year. Core inflation, excluding energy and indirect taxes, was 0.2 per cent in April. Norges Bank lowered its sight-deposit rate by 0.25 per cent to 1.75 per cent on 12 March to prevent inflation from falling below the 2.5-per-cent target in two years.
The new EU member states
Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia joined the EU on 1 May. The economies of these 10 countries are characterised by sound growth in output and demand in spite of the sluggishness in the EU. Overall GDP growth in the new EU member states was 3.6 per cent in 2003, primarily driven by an upswing in the largest economy, Poland.
In nearly all the new member states the upswing goes hand in hand with increasing balance-of-payments deficits, in several cases from an already high level. This development partly reflects strong domestic demand, particularly high investments, partly weak demand in the new member states' export markets, primarily the "old" EU, where they are, nevertheless, still gaining market shares.
Most of the new member states have seen expansionary fiscal policy and increasing budget deficits in recent years and are now trying to reverse this development. Inflation is either low or falling in most of the new member states. In Hungary, however, inflation rose until February, but has subsequently declined a little, to 6.9 per cent year-on-year in April.
After the accession of the 10 new member states to the EU, some of them can be expected to apply for membership of the Exchange Rate Mechanism, ERM II, in the near future[3].
Danish financial conditions
The krone strengthened marginally vis-à-vis the euro in March and April, and in mid-May the exchange rate was kr. 7.44 per euro, slightly stronger than the central rate of kr. 7.46038 per euro. In January and February, Danmarks Nationalbank sold foreign exchange for kr. 16.8 billion with a view to cushioning the fluctuations in the krone rate. In March and April, Danmarks Nationalbank purchased foreign exchange for kr. 1.8 billion.
The krone-rate fluctuations and Danmarks Nationalbank's interventions are mainly attributable to purchases of securities by residents and non-residents. The weakening of the krone in the first months of 2004 should be seen in the light of significant net purchases of foreign securities by Danish investors, primarily pension companies. The first months of 2004 also saw net sales of Danish krone-denominated bonds by non-residents. Subsequently, this trend reversed and net purchases were seen.
Danmarks Nationalbank has not changed its interest rates since June last year, when the lending rate was lowered to 2.15 per cent, 0.15 percentage points above the ECB's minimum bid rate. The current-account rate and discount rate are 2.0 per cent. In mid-May the interest-rate differential between Denmark and the euro area in the money market, irrespective of maturity, was 10-15 basis points, i.e. close to the differential between the monetary-policy interest rates in Denmark and the euro area.
Throughout the period Danish bond yields have been 17-19 basis points higher than the German ones, measured as the yield on 10-year government bonds.
Lending by banks and mortgage-credit institutes to households has shown an annual growth rate of approximately 8 per cent since the end of 2001, cf. Chart 11. This is somewhat stronger than the growth in consumption, implying an expansion of liquidity. Growth in the money stock, measured as M2, has been around 8-9 per cent in recent months. Thanks to the households' sound liquidity and rising disposable incomes it will not be a problem to finance increased private consumption in the near future.
| Lending by banks and mortgage-credit institutes |
Chart 11
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| Note: Including lending by foreign branches of banks. | |
| Source: Danmarks Nationalbank. | |
Lending by banks and mortgage-credit institutes to the corporate sector, including lending to non-financial corporations, which account for most of the business investments, increased by more than 5 per cent year-on-year in March after having risen by 2-4 per cent since end-2002.
Growth in lending by mortgage-credit institutes to households has for some years been higher than growth in lending by banks to households, but in recent months growth in the banks' lending to households has exceeded that of the mortgage-credit institutes, cf. the right-hand panel of Chart 11. New loan products are a contributing factor.
At the end of the 1st quarter of 2004 private individuals' deferred-amortisation loans from mortgage-credit institutes amounted to kr. 86 billion, equivalent to approximately 10 per cent of their total mortgage-credit loans. Most of the deferred-amortisation loans are adjustable-rate loans.
On 9 March 2004 the ECB switched to loans with a maturity of 7 days in its weekly main refinancing operations. The transition to the shorter maturity of the monetary-policy loans did not cause any problems, and the euro overnight index average (Eonia) remained close to the minimum bid rate after the transition, cf. Chart 12. In early April Eonia was briefly somewhat higher than the minimum bid rate in connection with the expiry of the reserve maintenance period, but such fluctuations are normal[4]. Fluctuations are, however, limited by the interest-rate corridor, consisting of the ECB's marginal deposit and lending facilities. The change in the ECB's lending instruments has not given rise to any change in the Danish instruments, cf. Danmarks Nationalbank, Report and Accounts 2003, p. 34.
| The ECB's interest rates and the overnight interest rate in the euro area |
Chart 12
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| Source: EcoWin. | |
The danish economy
The revised national accounts for Denmark showed an increase in GDP by 0.4 per cent in 2003. GDP decreased in the 2nd quarter, but rose in the 3rd quarter and particularly the 4th quarter, cf. Chart 13. Activity was fuelled by domestic demand, with private consumption accelerating towards the end of the year to an increase in the 4th quarter of 1.9 per cent over the preceding quarter after lower increases in the 2nd and 3rd quarters.
| GDP in Danmark |
Chart 13
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| Source: EcoWin. | |
Exports of goods and services in constant prices were more or less unchanged in 2003. The rise in imports became more marked in the 4th quarter of 2003, at 2.6 per cent quarter-on-quarter. Foreign-trade statistics show that particularly imports for the corporate sector have increased strongly since the spring of 2003, and this trend has continued into 2004. Imports for consumption excluding cars were flat throughout most of 2003, but began to rise towards the end of the year, and this trend has continued into 2004.
The indications of a current upswing are supported by the development in unemployment figures, which showed a fall by 5,400 from end-2003 to March 2004 (seasonally adjusted). This is partly a result of activation of the unemployed, but presumably also reflects increasing employment.
The upswing in the Danish economy came later than expected, as was the case in the euro area. The reason is slow development in both private consumption and exports. Exports were negatively affected by weak demand in the euro area, but also by the strengthening of the effective exchange rate of the krone and by Danish wage increases, which have for some years been more than 1 per cent higher than in our trading partner countries.
New 3-year collective agreements have been concluded for the major part of the private labour market. It cannot be said with certainty how wage costs will develop, since this will mainly depend on the local wage negotiations in the individual workplaces. Assessed on the basis of the collective agreements that include wage rates, the so-called normal wage area, wage increases will be lower than in recent years, presumably in the interval 3-3.5 per cent annually.
Since the mid-1980s real wages have risen by approximately 1.5 per cent annually on average, almost irrespective of the job situation, cf. Chart 14. Higher real wages give business enterprises an incentive to substitute capital for labour, and the effect on employment will typically lag. The expected more subdued wage development may boost employment in the years to come.
| Employment and increase in real wages in Denmark 1980-2003 |
Chart 14
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| Note: Real wages are quarterly, 8-month moving averages. | |
| Source: EcoWin. | |
On 16 March the Danish government presented a number of measures to ensure higher employment, known as the spring package. The key elements of the government initiative were: suspending the special pension contributions in 2004 and 2005, bringing forward income-tax cuts from 2005-07 to the current year, bringing forward government investments, and launching initiatives to activate the unemployed. Suspending the special pension contributions initially lowers private savings and increases the households' disposable income after pension contributions. At the same time, the tax base is increased, which partially finances the other elements of the spring package. The effect of the package on the government budget is therefore expected to be limited, while the impact on activity will depend on the extent to which the increased disposable income is spent on consumption. Danmarks Nationalbank's comments on the spring package appear from Box 4 and from Governor Bodil Nyboe Andersen's speech at the annual meeting of the Association of Danish Mortgage Banks on 29 April. The speech can be found on pp. 135ff.
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Danmarks Nationalbank's comments on the spring package
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Box 4
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At the press conference on 17 March in connection with the publication of Danmarks Nationalbank's Report and Accounts 2003 Governor Bodil Nyboe Andersen said: "As can be seen from the Report and Accounts, Danmarks Nationalbank finds that there is no pressing need to implement measures to adjust economic developments. Fiscal policy is already slightly expansionary, interest rates are historically low, and most observers share the view that an upswing is in the making. Although the unemployment rate is still low, both by international comparison and in a historical Danish perspective, it is on the increase. The widespread political view is therefore that further relaxation of fiscal policy is needed. Denmark's economic situation is robust with a government surplus, a considerable current-account surplus, a stable exchange rate of the krone and low inflation. Against this background we have to acknowledge that today the economic scope for relaxing fiscal policy exists. The government's plan may turn out to be too expansionary – it is too early to assess. However, especially in this light it is important that the plan applies a combination of temporary measures and bringing-forward of already adopted relaxations. It is essential to maintain the medium-term objective of expanding the supply of labour, limit the increase in public expenditure and reduce the government debt." |
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A delegation from the IMF visited Denmark in March in connection with the regular consultations. In its concluding statement the delegation emphasised, inter alia, that discretionary counter-cyclical policy should be kept as an exceptional response to avoid creating an expectation of fine tuning and short-term fixes that could weaken the effectiveness of the medium-term fiscal framework. The delegation expressed its satisfaction with the medium-term orientation of economic policy in Denmark[5].
Prices
Since mid-2003 inflation, measured as the annual increase in the Harmonised Index of Consumer Prices, HICP, has been lower in Denmark than in the euro area. Until March inflation showed a falling trend, but April saw an increase in inflation to 0.5 per cent year-on-year, 1.5 percentage points below the inflation in the euro area, cf. Chart 10.
Core inflation in Denmark, measured as the consumer-price index excluding energy, food, tobacco and alcohol, has been declining since mid-2003, but is still higher than in the euro area. The index is affected by import prices and indirect taxes and does not necessarily give a clear indication of the domestically determined price pressure. The latter is also known as domestic market-determined inflation, IMI. For a definition of IMI, see Box 5. IMI reflects Danish consumer prices stripped of indirect taxes, so-called exogenous factors and import prices. In recent months IMI has been relatively stable with increases on the high side of 2 per cent year-on-year, but it fell to 1.5 per cent in April. Currently there is thus no significant price pressure of domestic origin in the economy.
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Domestic market-determined inflation, IMI
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Box 5
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The starting-point for determining domestic market-determined inflation in Denmark is the index of net retail prices, i.e. the consumer-price index adjusted for indirect taxes and subsidies. By removing components which are not fully determined by conditions in the domestic market, e.g. food and energy, from the index of net retail prices, we get an expression of Danish core inflation: the index of net retail prices excluding exogenous factors. The development in this index is shown in Chart 15 (top). |
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| Index of net retail prices, import prices, GVA deflator and IMI |
Chart 15
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Nettoprisindekset fratrukket eksogene faktorer som fødevarer og energi påvirkes af ændringer i importpriserne, der kan være relativ tungtvejende for prisudviklingen i en lille åben økonomi som den danske. For at få et udtryk for den underliggende inflation, som "vi selv" er skyld i, udregnes et indeks for den indenlandsk markedsbestemte inflation, IMI. Det sker ved at trække The index of net retail prices less exogenous factors such as food and energy is affected by changes in import prices, which may play a relatively important role in the price developments of a small, open economy such as the Danish one. To get an impression of the underlying inflation that we have brought about "ourselves" an index of the domestic market-determined inflation, IMI, is calculated. This is done by eliminating the impact of import prices from the index |
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of net retail prices excluding exogenous factors using input/output coefficients. The residual describes the domestic market-determined prices. The development in IMI is shown in Chart 15 (middle), and is compared with the development in import prices. As a result of fluctuating import prices and sluggishness in net retail prices, the IMI is more volatile than the index of net retail prices. Fluctuations in import prices initially have the opposite impact on the IMI since business enterprises lower their profits in the short term. The impact on domestic prices is not really seen until some months later. The IMI index reflects Danish consumer prices stripped of, inter alia, indirect taxes, exogenous factors and import prices, i.e. the index resembles the deflator for gross value added, GVA, applied in the national accounts, cf. the co-variation between the IMI and the GVA deflators for the sectors supplying goods and services for private consumption, cf. Chart 15 (bottom). |
| Source: EcoWin, Statistics Denmark and own calculations. | |
Development of the pan-european payment system - Target2
The preparation of the new pan-European payment system is approaching the phase in which its functionality will be determined and decided upon. At a meeting with the European banking sector on 1 April 2004 the proposed functionality of the new system, which the central banks of France, Italy and Germany have offered to develop, was discussed. As a follow-up on this meeting the banks were asked to submit any comments and requests for new or changed functionality by 31 May 2004.
Background
The current Target came into force on 1 January 1999 and was established in order to ensure swift and safe cross-border payments in euro between the EU member states, including handling the ECB's monetary-policy transactions. The system is primarily intended for transfers of large-value payments, but is also widely used for retail payments. To save time, a fully decentralised solution was chosen rather than a centralised system designed from scratch. The solution chosen consisted in linking the existing national real-time gross settlement (RTGS) systems via an interlinking module. In an RTGS system, payments are settled individually and instantly.
Ever since the launch of Target, various models for a second-generation Target have been discussed. However, it proved to be difficult to reach agreement on a specific model since the central banks took very different approaches to the degree of centralisation.
At a meeting in October 2002, the ECB's Governing Council made a strategic decision on the elements of the next-generation Target, known as Target2. The background to this decision was, inter alia, that users perceive the services offered under the current decentralised structure as very heterogeneous across national borders. In addition, cost-effectiveness is low for the system as such. Finally, it is doubtful whether the current system will be able to meet the future challenges, including the enlargement of the EU.
Target2
The strategic decision entails that the continuing national subsystems will be supplemented with a common platform which central banks, including those in the non-euro area member states, may choose to use. In the first three years of Target2, this will be the only common platform. After this period, the individual central banks may decide to continue with their own platforms, join the existing common platform, or create a new platform that can be shared with other central banks. The common platform will be structured in such a way that each national central bank joining this platform can maintain its customer relations with its "own" credit institutions in connection with e.g. monetary-policy operations.
Target2 will provide a far more harmonised service level than the current structure. A wide range of core services to be offered by all central banks must be defined. These standard services will have a common price structure for both domestic and cross-border payments. The common price will be defined on the basis of the national RTGS system entailing the lowest costs per transaction, and any subsidy going beyond an acceptable public-good factor must be phased out by the end of the fourth year after the commissioning of Target2.
To ensure that Target2 meets the users' requirements, a statement of the principles for and structure of Target2 was published for public consultation in December 2002.
In July 2003 the central banks of Germany, Italy and France announced that they would jointly develop a new system as the new common platform for Target2, to be implemented on 1 January 2007. The proposal represents a compromise between two extremes, viz. constructing a new system from scratch and using an existing system. The aim is thus to integrate elements of each of the three central banks' current RTGS systems, i.e. the building-block principle. The advantages are that costs are kept low and that the development time for the common platform is shortened.
The common platform
The common platform will have a modular structure, which is also seen in other systems, including Danmarks Nationalbank's own RTGS system, Kronos. Some modules will be mandatory for the participating central banks, while others will be optional. Direct or indirect participation in the platform will be possible. Direct participants will have an RTGS account on the platform, from which payments are effected. Indirect participation in the common platform will be possible via a direct participant, including a central bank. Indirect participants will be registered on the platform, but will not have their own RTGS accounts. All communication between the direct participants and the common platform will take place via SWIFT. Ancillary systems such as VP and the Sumclearing may opt to settle participants' positions on the common platform. This will be possible via a special interface allowing a choice of different settlement models. Collateral handling will still be a national issue.
The common platform will offer participants a wide range of facilities for liquidity management, including prioritisation of payments, reservation of liquidity and setting of bilateral and multilateral limits vis-à-vis other participants. Participants will also be able to determine a specific time or period when a given payment is to be effected. There will be a queue for each type of prioritisation. The system will operate with various liquidity-saving mechanisms that will continuously attempt to settle queued payments taking into account the reservations and limits imposed.
The common platform will include an information and control module via which participants can monitor liquidity on their RTGS accounts, view ingoing and outgoing payments in the queues and change priorities, reservations and limits, etc.
The common platform will be operated in Germany and Italy on a rotation basis. Presumably the region will be changed every six months. The region not operating the system will act as the back-up region. In each of the two regions a primary and a secondary operations centre will be established, and the two operations centres will have real-time data mirroring. Interregional real-time data mirroring cannot be guaranteed owing to the geographical distance. If both centres in a region fail, operations are scheduled to be resumed within two hours.
The future work
In principle there may be other candidates for the common platform, but it is taken for granted that the proposal from the three central banks will also be the final bid for a common platform. The common platform has extensive support from the other EU central banks, and it is likely that they will all join the platform and thus phase out their respective national RTGS systems as regards euro payments. Target2 will thus become a single-platform system.
As mentioned above, the three central banks expect the platform to be ready by 1 January 2007. According to the plan, detailed functional and technical specifications will be prepared in 2004, and 2005 will be reserved for developing the platform. In 2006 it will be tested and implemented. For the central banks choosing to join the common platform, it will also be necessary to make a number of adjustments to the national payment infrastructures. Danmarks Nationalbank is currently analysing the consequences to the Danish payment infrastructure of transferring to the common platform. This is done in an ongoing dialogue with the financial sector.
[1] IMF, World Economic Outlook, April 2004.
[2] Cf. the article The Stability and Growth Pact – Status 2004, pp. 69ff.
[3] Cf. the article The 2004 enlargement of the EU, pp. 23ff.
[4] The reason why Eonia deviates from the minimum bid rate at the end of the reserve maintenance period is that the overnight interest rate after the last weekly liquidity allotment in a reserve maintenance period varies with the liquidity conditions in the money market.
[5] The conclusions can be found at Danmarks Nationalbank's website: www.nationalbanken.dk.