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The Danish EconomyThe Danish economy took a stable course in 2000. Growth was attributable particularly to increasing investments, whereas private consumption remained unchanged. Unemployment has stabilised at a low level after falling continuously since 1994. Wage and price increases have approached the rates of the euro area. Both government finances and the balance of payments show a surplus. Growth on Denmark's export markets is expected to dampen in 2001. The labour market is still tight and capacity utilisation high. In the short term it is crucial to avoid acceleration in wage increases, in order to maintain price stability and avoid compromising competitiveness. In the longer term, the principal challenge is to continue to bring down both the government debt and the external debt. The need for fiscal prudence is enhanced by the fixed-exchange-rate policy. There is thus no scope for further relaxation of fiscal policy in the coming years – neither as increased government expenditure nor as unfinanced tax cuts. International backgroundGlobal economic growth is slowing down. Growth in the gross domestic product, GDP, of Denmark's trading partners is estimated to decrease from 3.4[1] per cent in 2000 to 2.6[2] per cent in 2001. In 2000 growth was strongest in the first six months. In contrast to previously the trend during the winter was for downward adjustment of the international growth forecasts for 2001, including a strong reduction of the expected rate of growth in the USA. As in 1999, oil prices rose in 2000, leading to some upward pressure on consumer prices. Long-term interest rates fell throughout 2000. In 2000 the USA saw the highest growth rate since the beginning of the boom in 1992. Preliminary data releases indicate that GDP rose by 5 per cent. As in previous years the main contributing factor was private consumption, and savings continued to decline. The record-high current- account deficit is attributable to low savings combined with high investment. One result of the favourable cyclical course is a higher government surplus. Although inflation rose during 2000, the increase has so far been moderate in view of the strong growth and low unemployment rate. The moderate increase in inflation is related to the remarkably strong improvement in productivity. Productivity in the non-farm business sector increased by 4.3 per cent in 2000, compared to 2.7 and 2.6 per cent in 1998 and 1999 respectively. At the close of the year a number of key indicators showed a significant slowdown in the US economy, as indicated by e.g. the strong decline in business and consumer confidence. Against this background, on 3 January and 31 January 2001 the Federal Reserve lowered its official short-term interest rate – the federal funds target rate – by a total of 1 per cent to 5.5 per cent. Growth in Japan was only moderate, cf. Chart 1. The GDP growth estimate for 2000 is 1.9 per cent. The contributing factors were exports and business investments, whereas growth in private consumption was weak. Chart 1 Gross domestic product, GDP 
The strength of the current upswing in Japan is subject to considerable uncertainty and the business community continues to be burdened by a large number of failing businesses. Weaker global growth in the coming years, and thereby a lower rate of increase in exports, may dampen the upswing. The large number of economic measures taken by the Japanese government since 1992 have led to high government deficits and a surge in government debt. In 2000 Japan's government budget deficit was 6 per cent of GDP, while its government debt accounted for 112 per cent of GDP. Growth accelerated in the euro area during 2000. The OECD estimates growth in GDP at 3.5 per cent, which is the strongest expansion of the economy since 1990. The main contributor was exports, supported by strong global demand and improved competitiveness resulting from the weakening of the euro against the dollar and other currencies up to the end of October. Domestic demand was driven by the private sector via higher private consumption and increased capital formation. Euro-area inflation rose during 1999 and 2000, due mainly to increasing energy prices. The average rate of price increases in 2000 was 2.3 per cent. This exceeds the ECB's definition of price stability as a year-on-year increase in consumer prices of below 2 per cent. The oil price fell towards the end of the year, which led to a moderation of inflationary pressure at the beginning of 2001. Euro-area unemployment has fallen steadily since the autumn of 1997. At the end of 2000 8.7 per cent of the labour force were unemployed. However, the individual rates of the member states vary considerably. In recent years the government finances of the euro area as a whole have improved significantly. The small government budget surplus in 2000 is attributable to such factors as extraordinary revenue from the sale of UMTS licences[3]. The euro area taken as one had a small current-account deficit. Towards the end of the year a number of key indicators showed that growth would dampen in the coming year, although the slowdown will probably be less pronounced than in the USA. Business and consumer confidence were high, and fiscal policy is relaxed after tax cuts in e.g. Germany, France and Italy in 2001. Preliminary data show growth in GDP of 3 per cent in the UK in 2000. Growth is still driven mainly by private consumption. Inflation is low, even though the labour market is tight. The upswing in Sweden continued in 2000 and preliminary data indicate GDP growth of 4 per cent, to which both domestic demand and exports contributed. Inflation has been rising, but is still low. In Norway growth in GDP was 2.2 per cent in 2000, following low growth in 1999. Exports and private consumption were the main factors driving growth. Unemployment is very low, and inflation is high. Economic activity in DenmarkThe structure of growth in the Danish economy has changed, becoming more balanced in recent years, cf. Chart 2. After some years of rising private consumption, the expansion of domestic demand, and thereby imports, dampened in 1999, and exports showed a significant improvement. Growth increased somewhat in 2000, and is estimated at 2.5 per cent, against 2.1 per cent in 1999, cf. Table 1. The growth can be attributed to higher investment, comprising both housing and business investments, primarily due to the large-scale repairs required after the hurricane in Denmark in December 1999. Part of the expansion of business investments is related to higher capacity utilisation during the year, primarily due to the improvement in exports. Chart 2 Contributions to growth 
Table 1 Key figures for the Danish Economy
The pronounced slowdown in private consumption in 1999 continued into 2000. In the first half of 2000 private consumption even declined, but then increased moderately. Overall, private consumption made no contribution to growth in 2000. The dampening of private consumption is related to weak development in the households' real disposable income, as well as a strong decrease in car sales in reaction to the high sales in the previous years. Moreover, the savings ratio increased in 2000, attributable to the incentives in the Whitsun package of 1998. As a result of the strong growth in private investment the private sector continued to show a savings deficit, amounting to 1.1 per cent of GDP in 2000. Besides stimulating private savings the Whitsun package also aimed at dampening the rate of increase in property prices. According to the Association of Danish Mortgage Banks prices rose at a lower rate in 2000, although house prices are still rising more quickly than prices for consumer goods. However, the number of property sales has declined, and in this respect the housing market has dampened. Total government demand, i.e. government consumption and investment, rose by 1 per cent in 2000. Preliminary statistics indicate a slightly contractive fiscal policy, with a fiscal effect of 0.1 per cent of GDP. The overall economic policy, including the structural effects of the Whitsun package, is estimated to have dampened economic activity by 0.6 per cent of GDP in 2000. The monetary conditions are still expansionary. Long-term interest rates have fallen, while the effective krone rate weakened in both nominal and real terms during the year, cf. Chart 3. Short-term interest rates have risen, however. As a consequence of the fixed-exchange-rate policy vis-à-vis the euro the weaker effective krone rate reflects the strengthening of the dollar and the yen against the euro up to October when the nominal effective krone rate reached its lowest level. At the end of the year the nominal effective krone rate was 1.7 per cent lower than at end-1999. Expansionary monetary conditions underline the need for a tight fiscal-policy stance. Chart 3 Nominal and real effective krone rates 
Total employment rose by around 22,000 in 2000, which approximately corresponds to the increase in 1999, cf. Table 2. Employment in the private sector (including the self-employed) rose by 21,000, while employment in the public sector rose by 1,000. Table 2 The Danish labour market
After falling continuously since 1994 the unemployment rate levelled off in 2000, and has been almost unchanged since April 2000. At the close of the year 5.4 per cent of the labour force were unemployed. According to the Eurostat definition, the unemployment rate was 4.7 per cent.[4] In contrast to the preceding years, the labour force expanded in 2000. An increasing supply of labour would make it easier to ensure a continuing expansion of activities and living standards without higher wage increases. In 2000 employment rose slightly less than activity, entailing a moderate increase in productivity. Balance of paymentsThe current-account surplus in 2000 was kr. 19 billion, corresponding to 1.5 per cent of GDP. The surplus of 1999 was thus maintained. Stagnating private consumption allowed growth in exports to continue. Exports were further stimulated by a good rate of growth in Europe, and a decrease in the effective krone rate. Growth in imports accelerated in 2000 against the background of the increase in business investments. In overall terms, the balance of goods has improved by kr. 4 billion against 1999, and the balance of services by approximately kr. 9 billion, cf. Chart 4. Interest and transfers, etc. have deteriorated by kr. 15 billion since December 1999. Chart 4 The balance of payments 
Despite the benefit from improved competitiveness caused by the decline in the effective krone rate, a net gain in market share was not achieved in 2000 as in 1999. The reason may be the high capital utilisation in many sectors of manufacturing after the rise in manufactured exports in 1999, and the lack of scope for further expansion of production capacity in the short term. In the longer term there is a clear relation between competitiveness and market shares. It is therefore important that wage increases in Denmark do not exceed wage increases in the euro area. The current-account surplus in 2000 made a positive contribution to reduction of Denmark's external debt. However, the external debt is also affected by value adjustment of assets and liabilities (shares and bonds). A provisional estimate of Denmark's external debt at end-2000 is published at the end of March 2001. Credit expansionAfter several years of decrease in private savings, this trend was reversed in 1999. The private sector's savings deficit was reduced a little further in 2000. This trend is reflected in lending by banks and mortgage-credit institutes, but the rate of increase is still high, cf. Chart 5. The rate of increase in lending to the business sector has been higher than the rate of increase in lending to the non-business sector. This is related to such factors as the strong growth in investments and the moderate growth in private consumption. Chart 5 Change in domestic lending by banks and mortgage-credit institutes 
At end-2000 mortgage-credit loans at adjustable interest rates accounted for around kr. 100 billion, corresponding to 9 per cent of total mortgage-credit lending, against 6 per cent in 1999. Variable-interest loans were raised particularly at the beginning of the year. The yield curve has made it relatively less attractive to raise loans at adjustable interest rates. At end-2000 euro-denominated lending by the mortgage-credit institutes was kr. 6 billion higher than in 1999 and accounted for kr. 16 billion of the total lending of kr. 1,095 billion. The trend followed by borrowing in 2000 was not reflected in the monetary aggregate M3. The money stock, which consists of the deposits with the banks from private individuals, business enterprises and local governments, together with their holdings of banknotes and coins, was unchanged. The money stock has thus not increased by the transaction requirement measured as the value of domestic demand. Wage and price trendsAfter declining in the first half-year the rate of wage increase registered by the Danish Employers' Confederation rose in most sectors in the second half-year. The rate of wage increase for the year as a whole was 3.7 per cent, which was below the rate of increase in 1999. Wages are still increasing faster in Denmark than in the euro area, although the rates have tended to converge since the beginning of 1999, cf. Chart 6. As the labour market remains tight there is a risk that the rate of wage increase in Denmark will begin to rise again. Chart 6 Wage increases in Denmark and abroad 
Measured in HICP terms, inflation in Denmark was 2.7 per cent in 2000, against 2.1 per cent in 1999. Inflation was on average higher in Denmark than in the euro area, even though the inflation differential was eliminated during the year. Inflation was sustained by strong price trends for energy, imported goods and public services. On the other hand, underlying inflation, which is a measure of the domestic market-determined price increases, was low throughout 2000, cf. Chart 7. This was primarily a result of weak growth in profit margins, since increases in import prices were not passed on to consumers. Chart 7 Increase in consumer prices and underlying inflation 
Economic prospectsAt the beginning of 2001 there are no acute imbalances in the Danish economy. The growth in 1999 and 2000 was driven by the strong upturn in the global economy, while domestic-market activity was moderate. Domestic demand thus rose less in Denmark than abroad, which benefited the balance of payments, cf. Chart 8. Chart 8 Relative domestic demand and balance of payments 
An important risk factor in the short term is the dampening of growth abroad, especially in the USA. In conjunction with the increase in the effective krone rate since October 2000 this may make it difficult to sustain growth in exports and thereby the considerable current-account surplus. Price and wage trends must be compatible with price stability if competitiveness is to be maintained. The labour market is still tight and capacity utilisation high, so there is still a risk of upward pressure on wages. The government sector should avoid contributing to further wage pressure via higher employment than planned, or via the derived effects on activity of strong increases in government expenditure. It is necessary to maintain a current-account surplus and a budget surplus in order to continue the reduction of the external debt and the government debt. The need for fiscal prudence is enhanced by the fixed-exchange-rate policy. Real growth in government consumption in 2001 is estimated to be a good deal stronger than the government's medium-term objective of an annual increase of 1 per cent. There is thus no scope for further relaxation of fiscal policy in the coming years – neither as increased government expenditure nor as unfinanced tax cuts. Footnotes[1] The OECD's autumn forecast, Economic Outlook No. 68, November 2000. [2] Consensus forecast published by Consensus Economics Inc. [3] UMTS (Universal Mobile Telephone System) licences are the sale of transmission licences for third-generation mobile telephony. [4] Eurostat is the statistical body of the European Commission. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Version 1.0 March 2001 Nationalbanken. |