Real-Economic Development
The international economy
Development in the international economy has been weak in recent years, with considerable fluctuations in the financial markets. The international stock markets have declined significantly, accompanied by reduced yields in both the money and bond markets. In the euro area, which has seen very moderate growth rates in the last 1½ years, the problems are especially pronounced in the three large member states, Germany, France and Italy. The US economy achieved relatively sound growth in 2002, but with a very large current-account deficit, reflecting an increasing savings deficit in the public sector.
The expected onset of a renewed international upswing has been deferred several times in the past year, and neither consumers nor companies have any strong confidence in the future course of the economy. It is a widespread perception, however, that the US economy will start to recover in the 2nd half of 2003. This was expressed most recently in the OECD's economic outlook from April. However, the imbalances described, especially the growing government deficit, may contribute to dampening growth. The prospects for the European economy, and in particular Germany, are more pessimistic. For Germany, the consensus growth estimate for the current year has now been adjusted downwards to below 1 per cent. Some of Denmark's other trading partners, e.g. Sweden and the UK, also saw receding growth in the 2nd half of 2002. The overall development in the Danish export markets does not point to any expansion of exports in the immediate future.
The Danish economy
Economic activity in Denmark slowed down during 2002. According to the latest national accounts, GDP rose significantly in the 1st half of 2002, but then declined in the 3rd quarter, followed by a moderate increase in the 4th quarter. For 2002 as a whole, growth was slightly higher than in 2001. According to the most recent official forecasts growth of around 1½ per cent is expected in 2003, cf. Table 1. This is slightly below the expectations at the turn of the year, and thus confirms the dampening.
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Table 1 |
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Danish Economic Council
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The Government
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Economic Council of the Labour Movement
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EU
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OECD
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Nov.
2002 |
Dec.
2002 |
Feb.
2003 |
Apr.
2003 |
Apr.
2003 |
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Percentage change vis-à-vis the previous year
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| 2003 | ||||||
| GDP |
1.9
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1.8
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1.3
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1.5
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1.6
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| Private consumption |
2.7
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2.2
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2.3
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1.8
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1.9
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| Business investments |
0.8
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2.7
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-0.1
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1.6
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0.8
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| Exports |
3.6
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3.8
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1.6
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2.0
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3.1
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| Hourly wages |
4.0
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3.9
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3.7
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3.8
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3.9
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| Employment |
0.3
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0.1
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-0.5
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-0.3
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0.0
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| 2004 | ||||||
| GDP |
1.9
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2.1
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2.0
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2.2
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2.6
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| Private consumption |
1.9
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2.4
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2.4
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2.3
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2.2
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| Business investments |
2.2
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3.8
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0.4
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3.8
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3.5
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| Exports |
4.2
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5.8
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3.8
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4.7
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7.5
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| Hourly wages |
3.8
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3.7
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3.7
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3.9
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4.2
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| Employment |
0.2
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0.5
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0.1
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0.4
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0.5
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Growth in the Danish economy in 2002 was driven especially by private consumption, which accelerated during 2002 after a few sluggish years, cf. Chart 1. In the 4th quarter of 2002 private consumption was thus almost 3 per cent above the level for the same quarter of 2001. For 2003 and 2004 the estimates for total private consumption are around 2-2½ per cent. The latest figures for new passenger car registrations and consumer confidence are both weak, while retail turnover is increasing very strongly. Sound growth in real disposable incomes and the low level of interest rates are expected to sustain growth in consumption, while a relatively high wealth ratio and a low consumption ratio ensure a sound starting point.
| Private consumption and consumer confidence, 1990-2003 |
Chart 1
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| Note: Seasonally adjusted data. | |
| Source: Statistics Denmark. | |
In 2002 business investments were at by and large the same level as in 2001. Investments in plant and equipment are at a high level after several years of strong increases. Many of the investments relate to IT equipment and other technological equipment, which have a shorter economic life than other capital stock. The higher investment level is thus offset by substantial write-offs and may therefore be of a more permanent nature. This also reduces the probability of an actual setback in investments. Construction investments are at a more moderate level, without any signs of a perceptible upswing. The latest estimates of total business investments point to only moderate growth in 2003, and are thus in line with the weak business confidence indicators.
Stable growth in residential construction does not offset the decline in business construction, so that overall construction activity has developed weakly in recent years. Residential construction will be supported by the government's package of housing measures from 2002 to promote e.g. the construction of private rental properties and the renovation of public housing.
The significant increases in house prices in recent years appear to have ceased, while the number of house sales has remained flat since 1999, cf. Chart 2. The increase in house prices is hardly expected to exceed the general development in prices in the near future, but on the other hand there is no apparent immediate risk of a pronounced downturn in the housing market, nor of the major fluctuations in house prices seen in previous decades. This reflects that the imbalances in the Danish economy are considerably less pronounced than was previously the case.
To some extent Danish exports have defied the subdued growth in the international markets and won market shares in recent years. The favourable reaction to the international development to a large extent reflects the structure of Danish exports, including a relatively low proportion of investment goods, which are traditionally very cyclically sensitive. In addition, the market for some of the dominating export products, e.g. wind turbines and pharmaceutical products, has not been significantly affected by the recession.
| House prices and number of sales, 1996-2003 |
Chart 2
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| Note: Seasonally adjusted data. | |
| Source: The Association of Danish Mortgage Banks. | |
Despite the slowdown, the Danish economy has so far steered safely through the weaker international economy. Falling employment in 2002 and a moderate increase in unemployment have eased the pressure on the Danish labour market, which is, however, still tight in international terms. For a number of years wage increases have exceeded those abroad. Together with a stronger effective krone rate this weakens competitiveness. Competition in the national and international product markets limits the extent to which the business enterprises can pass on increased wage costs as higher prices, so that business earnings may come under pressure.
The imbalances in the Danish economy are generally moderate. In 2002 sound surpluses were achieved on both the government budget balance and the current account of the balance of payments. The private sector has gradually eliminated its financial savings deficit, i.e. gross investments less gross savings, from 2 per cent of GDP in 1998 to a surplus of more than 1 per cent of GDP in 2002. This is primarily the result of higher savings and a decline in housing construction.