The Danish Economy
After several years of strong growth the Danish economy lost momentum in 1999. The lower growth was due to more subdued domestic demand, which reduced the imbalances in the economy. Pressure on capacity diminished and the rate of wage increases subsided, but is still above the level for the euro area. Recent years' deterioration in the current account has been reversed and a surplus in the range of kr. 10 billion is estimated for 1999.
Despite the reduced capacity pressure consumer prices accelerated, which is for example related to higher energy and food prices.
There are prospects of higher growth on Denmark's export markets, giving an opportunity for further expansion of exports. The Danish labour market is still tight and there is a risk that wage increases will remain excessive and competitiveness deteriorate.
International Background
The outlook for the global economy is fundamentally positive. The OECD expects growth in the gross domestic product, GDP, of Denmark's trading partners to increase to 2.7 per cent in 2000 from 2.1 per cent in 1999. [1] The upswing in the USA continued in 1999, while growth in the euro area accelerated during the year. Crude oil prices rose significantly in 1999, leading to some pressure on consumer prices. Long-term interest rates were rising in 1999.
The financial crisis in Southeast Asia has been overcome and generally growth in that region has been strong. The situation in Russia was still uncertain at the close of 1999. However, the main issue for the global economy is whether the long period of high growth and low inflation in the USA can continue in 2000.
In the USA, for the third consecutive year growth was at a high level of more than 4 per cent, cf. Chart 1. The boom has thus lasted for 8 years without bringing high inflation in its wake. Excluding energy and food, inflation in fact declined in 1999. The upswing in the USA is related primarily to private consumption, which is stimulated by strong increases in share prices and rising real-estate prices, among other factors. Consumption as a proportion of income has increased so strongly that households' savings are virtually eroded and the current account of the balance of payments shows a large deficit. There was a surplus on government finances in 1999.
Chart 1 Gross domestic product, gdP
| Note: | Constant prices, seasonally adjusted. |
| Source: | National statistics and own calculations. |
After negative growth in Japan in 1998 the trend reversed. GDP is estimated to have increased by 1.4 per cent in 1999. Growth was driven primarily by government investments and private consumption, stimulated by tax reductions, among other factors. The yen rose strongly against the dollar in 1998, and increased further in 1999. The Bank of Japan sought to support exports by dampening the appreciation of the yen via intervention in the currency market.
Nonetheless, the improvement in economic activity is uncertain. The restructuring of the Japanese business and financial sectors has exacerbated fears of unemployment, which can have a negative impact on private consumption. Moreover, opportunities to introduce additional government measures are limited. In November 1999 the Japanese government put forward the ninth package of measures to boost activity since 1992, and in 1999 the general-government budget deficit is expected to be 7.6 per cent of GDP.
In the euro area taken as one growth accelerated during 1999 after a moderate dampening of private consumption and weak exports towards the end of 1998 and in the beginning of 1999. The OECD estimates GDP growth at 2.1 per cent in 1999 and that growth will increase in 2000.
Despite augmented growth and the depreciation of the euro prices in the euro area dampened in 1999. Energy and food prices contributed to higher inflation. The average rate of price increases in 1999 was 1.1 per cent, which is within the bounds of the European Central Bank's definition of price stability as a year-on-year increase in consumer prices of below 2 per cent.
Euro-area unemployment fell in 1999, but was still high at the close of the year. The average unemployment rate of the euro area in 1999 was 10 per cent of the labour force, but this concealed major variations among the individual countries. Growth in wage costs in the euro area was below 2.5 per cent up to the 3rd quarter of 1999.
In 1999 the current account of the euro area showed a surplus of 0.8 per cent of GDP, while the average government deficit was 1.6 per cent of GDP. As in the case of unemployment, variations among the individual countries were considerable.
After a shortlived economic slowdown in the UK at the end of 1998 the economy has reversed and provisional statistics show GDP growth of 1.9 per cent in 1999. Stimulated by strong domestic demand, economic growth in the UK has thereby recovered quickly from the weakening of exports at the end of 1998 and the beginning of 1999. Net exports rose in the 2nd half of 1999 despite the continued strength of sterling, thus reducing the division of the British economy into a strong domestic sector and a weak export sector.
In Sweden the upswing continued in 1999 and provisional statistics indicate GDP growth of 3.9 per cent. Growth was stimulated by both domestic demand and exports. Inflation rose in 1999, but the level remained low.
After a number of years of high growth and signs of overheating Norway saw a dampening in 1999 with expected GDP growth of 0.6 per cent. The dampening was related primarily to a decrease in domestic demand.
Greece, which has announced that it will apply to join the euro area as from 1 January 2001, enjoyed high growth of around 3.3 per cent in 1999. The unemployment rate was just over 11 per cent, while inflation for the whole of 1999 was 2.4 per cent.
Economic Activity in Denmark
The economic reversal in 1999 stood out clearly from the upswing of previous years. GDP is estimated to have risen by 1.5 per cent in 1999, compared to 2.7 per cent in 1998, cf. Table 1. The lower growth was due to more subdued domestic demand, which was particularly apparent in the 1st half of the year, cf. Chart 2. Exports recovered and the contribution of net exports to GDP growth was positive.
Table 1 Key figures for the danish economy
| Real growth against the previous year, per cent | 1995 | 1996 | 1997 | 1998 | 19991 |
| Private consumption | 2.6 | 2.9 | 3.7 | 3.5 | 0.6 |
| Government demand | 2.3 | 3.7 | 1.0 | 2.5 | 1.1 |
| Business investments | 17.1 | 3.6 | 12.3 | 8.5 | 2.7 |
| Residential investments | 5.3 | 7.3 | 7.7 | 5.1 | 0.9 |
| Domestic demand, excluding stockbuilding | 4.6 | 3.4 | 4.5 | 4.1 | 1.1 |
| Stockbuilding2 | 0.8 | -0.8 | 0.1 | 0.4 | -1.1 |
| Domestic demand, total | 5.5 | 2.5 | 4.6 | 4.6 | 0.0 |
| Exports | 3.5 | 5.0 | 4.4 | 1.4 | 6.7 |
| Imports | 8.8 | 4.3 | 8.5 | 6.4 | 2.9 |
| Net exports2 | -1.6 | 0.4 | -1.3 | -1.8 | 1.5 |
| Gross domestic product, GDP | 3.7 | 2.8 | 3.1 | 2.7 | 1.5 |
| Unemployment, per cent of the labour force | 10.4 | 8.9 | 7.9 | 6.6 | 5.7 |
| Consumer-price index, percentage growth | 2.1 | 2.1 | 2.2 | 1.9 | 2.5 |
| Current account, per cent of GDP | 1.0 | 1.7 | 0.4 | -1.1 | 0.9 |
| General-government balance, per cent of GDP | -2.2 | -1.0 | 0.5 | 1.2 | 2.8 |
| Private savings surplus3, per cent of GDP | 3.2 | 2.7 | -0.1 | -2.3 | -2.0 |
| Source: | Statistics Denmark. |
| 1 | Partial estimate, based on provisional statistics from Statistics Denmark. |
| 2 | Contribution to growth in GDP at constant prices. |
| 3 | Current-account surplus plus general-government budget deficit. |
Chart 2 Gross domestic product and domestic demand
| Note: | 1990 prices, seasonally adjusted, annual level. |
| Source: | Statistics Denmark. |
Private consumption rose by 0.6 per cent, which was a clear slowdown against the preceding years. In the first six months of the year private consumption even declined, but then rose moderately. Nonetheless, the consumption ratio was still high and the savings deficit of the private sector was 2.0 per cent of GDP in 1999. The declining trend for private savings came to a halt, however.
Growth in government consumption and government investments was 1.1 per cent, which was less than half the increase in the previous year.
The balance of the economy improved in 1999, related to such factors as the Whitsun package of economic measures, a higher level of interest rates and stronger growth on export markets. The objective of the Whitsun package, adopted in 1998 to be gradually phased in from 1999, was to dampen private consumption and boost private savings. The measures used included a reduction of the tax deductibility of interest payments in order to dampen property prices and also make borrowing less attractive.
The reduced tax deductibility of interest payments and the higher level of interest rates in 1999 can be assumed to have had an impact on private consumption, even though a dampening of property prices was not immediately apparent. Property prices continued to rise in the first three quarters of the year. The official statistics for the whole of 1999 are not yet available, but the statistics of the Association of Danish Mortgage Banks show a decrease in the 4th quarter. The dampening of the housing market at the end of the year was also reflected in the sales volume, which fell significantly in the 4th quarter.
Including the effects of the Whitsun package on private savings, the overall economic policy in 1999 contributed to a dampening of domestic demand. The Finance Act for 2000 entails a more expansionary fiscal policy than proposed by the government in the Finance Bill for 2000. However, the government still expects that the tightening resulting from the structural impacts of the Whitsun package will not be undermined.
The monetary conditions are still expansionary despite rising interest rates in the 2nd half of 1999. Interest rates are still low, and moreover the nominal and real effective krone rates fell in 1999, cf. Chart 3. This makes it even more imperative to maintain the fiscal-policy objectives.
Chart 3 Nominal and real effective krone rates
| Note: | Real effective krone rate based on hourly earnings in manufacturing industry. The real effective krone rate denotes the trend for Danish wages compared to abroad in a common currency. For the real effective krone rate partial estimate for 4th quarter 1999. |
| Source: | Statistics Denmark, OECD and own calculations. |
Total employment rose by 26,000 in 1999, cf. Table 2. This is less than the increase by 56,000 in both 1997 and 1998. Employment growth was lower in both the private and public sectors. The percentage increase in employment in 1999 was slightly less than the expansion of activity, reflecting a small upturn in productivity.
Table 2 the danish labour market
| 1,000 persons, annual average | 1996 | 1997 | 1998 | 19991 |
| Wage and salary earners | ||||
| Private sector | 1,581 | 1,624 | 1,672 | 1,697 |
| Public sector | 780 | 794 | 805 | 808 |
| Self-employed | 213 | 211 | 208 | 206 |
| Total employment | 2,573 | 2,629 | 2,685 | 2,711 |
| Unemployed | 246 | 220 | 183 | 158 |
| Labour force | 2,819 | 2,849 | 2,868 | 2,869 |
| Recipients of early-retirement benefit2 | 167 | 170 | 176 | 179 |
| Recipients of leave benefits | 63 | 46 | 41 | 33 |
| Unemployment, per cent of the labourforce | 8.9 | 7.9 | 6.6 | 5.7 |
| Unemployment, EU-definition,per cent of the labour force3 | 6.8 | 5.6 | 5.1 | 4.5 |
| Source: | Statistics Denmark, the Directorate General for Employment Placement and Vocational Training and owncalculations. |
| 1 | Partial estimate, based on provisional statistics. |
| 2 | Including recipients of transitional allowance. |
| 3 | urostat method. |
The dampening of employment growth was accompanied by an almost unchanged labour force and a decline in unemployment by 25,000 in 1999. At the close of the year 5.4 per cent of the labour force were unemployed.
Balance of Payments
The balance of payments improved in 1999. The provisional statistics indicate a surplus for the year as a whole in the range of kr. 10 billion, equivalent to 0.9 per cent of GDP. The improvement was related to such factors as more favourable manufacturing exports in 1999 than in 1998. The growth in exports was sustained by the initial cyclical upswing in Europe, lower capacity utilisation and a weaker effective krone rate. At the same time, growth in imports diminished in 1999 as a consequence of a strong reduction of stocks and subdued domestic demand. Overall the trade balance has improved significantly since December 1998, reversing the course of the current account, cf. Chart 4.
Chart 4 The balance of payments
| Note: | 12-month moving average. |
| Source: | Statistics Denmark. |
For the first time in a number of years Danish exports did not lose market share. There are signs that in order to win market shares Danish enterprises are refraining from increasing export prices. This indicates lower pressure on manufacturing industry's capacity. The current account has thus once again served as a good and rapid indicator of the economy's course. A sustained tendency for the current account to deteriorate reflects high pressure on capacity or lack of competitiveness.
Even though the current account improved Denmark's competitiveness is still hampered by higher wage increases than abroad. To sustain the positive course of both employment and the current account, it is vital that the rate of wage increases is further contained.
The current-account surplus in 1999 in itself contributed to a reduction of Denmark's external debt. The value adjustment of assets and liabilities (shares and bonds) is evaluated to have reduced the external debt further [2]. The reason is that share prices rose and bond prices fell both in Denmark and abroad. At the beginning of 1999 residents held net positions in shares and non-residents held significant net positions in bonds.
Credit Expansion
For several years private savings decreased, but in 1999 this came to a halt. This is reflected in lending by banks and mortgage-credit institutes, for which the rate of increase declined during 1999, but is still at a high level, cf. Chart 5. The weakening of credit demand was most pronounced among non-business customers, reflecting the more moderate growth in private consumption.
Chart 5 Change in domestic lending by banks and mortgage-credit institutes
| Note: | Lending denominated in both kroner and foreign exchange. Adjusted for losses and provisions. |
New lending by mortgage-credit institutes for owner-occupied homes has shifted towards loans at adjustable interest rates, in reaction to the significantly lower short-term interest rates versus long-term bond yields in 1999, cf. page 39. At the close of the year mortgage-credit loans at adjustable interest rates accounted for almost kr. 60 billion, or just below 6 per cent of total mortgage-credit lending.
At end-1999 euro-denominated lending by the mortgage-credit institutes amounted to kr. 10 billion of the total lending of kr. 1,033 billion.
The money stock, which consists of deposits with the banks from private individuals, business enterprises and local governments together with their holdings of banknotes and coins, rose by 4.2 per cent in 1999, in line with the preceding years. The money stock has thus increased by slightly more than the transaction requirement measured by the value of domestic demand.
Wage and Price Trends
Wage growth dampened during 1999. According to the wage statistics compiled by the Danish Employers' Confederation, wages rose by 4.2 per cent in the 4th quarter compared to 5.0 per cent in the 1st quarter. The rate of wage increase for the year as a whole was 4.4 per cent, which was equivalent to the rate of increase in 1998.
The rate of wage increase is still high and is above the rate of increase in the euro area, as has been the case since the start of 1996, cf. Chart 6. Wages in Denmark have risen by a total of 15 per cent since 1996, while the increase in the euro area in the equivalent period is 9 per cent. In view of current EU-harmonised unemployment rates of around 4 per cent in Denmark and just below 10 per cent in the euro area the Danish labour market will remain tighter than that of the euro area for some time to come, despite increasing activity in the euro area.
Chart 6 Wage increases in denmark and abroad
| Note: | Abroad, total is the countries included in the effective-krone-rate index. The wage increases are weighted together using the weights of the index. |
| Source: | Statistics Denmark, OECD and own calculations. |
The high Danish wage increases can present a challenge to Danish competitiveness and the objective of price stability. Therefore it is important that the wage dampening is sustained in the face of the tight labour market. It is also vital that the general-government sector does not contribute to additional pressure on wages via higher employment levels than planned, or via the derived effects of wage increases in the general-government sector. In 1999 wages in the central-government sector rose by an average of 4.5 per cent and in the local-government sector by 3.2 per cent.
The year-on-year rate of increase in consumer prices rose to an average of 2.5 per cent in 1999. The rate of increase was 3.2 per cent at the close of the year. The rising inflation is attributable in particular to higher energy prices. However, the element of inflation which is determined in the Danish market was also substantial in 1999. This is related to such factors as the high Danish wage increases.
The inflation rate exceeds the rate of price increases in the euro area. In HICP terms inflation in Denmark was 2.1 per cent for the whole of 1999, while for the euro area taken as one it was 1.1 per cent. At the close of 1999 Denmark equalled the inflation criterion for participation in the euro area, cf. Chart 7. It is not possible for Denmark to have higher wage and price increases than the euro area for an extended period without a negative impact on competitiveness, thereby jeopardising the favourable employment situation.
Chart 7 Inflation in relation to the inflation criterion of the maastricht treaty
| Note: | Inflation is calculated as a 12-month moving average of HICP growth. The convergence criterion is calculated as a 12-month moving average of the averages of the three lowest inflation rates in the EU member states plus 1.5 per cent. |
| Source: | Eurostat and own calculations. |
Economic Prospects
Domestic activity has subsided and growth rates among Denmark's trading partners are picking up, which prepares the ground for the Danish economy to take a more balanced course. For the first time since the early 1990s demand is rising faster abroad than in Denmark, which is beneficial to the current account, cf. Chart 8.
Chart 8 Relative Domestic Demand and Balance of Payments
| Note: | The balance of payments is a 4-quarter moving average. Domestic demand abroad is weighted together using the weights of the effective-krone-rate index. Partial estimate for 4th quarter 1999. |
| Source: | Statistics Denmark, OECD and own calculations. |
The prospects of continuing subdued domestic demand and higher exports are beneficial to the Danish economy. It is possible to keep unemployment low, while also reducing the external debt. In view of the future age composition of the population, with a larger proportion of elderly people and a smaller active population, it is important that Denmark does not forfeit the opportunity to reduce the external debt and to bring down interest expenditure within the foreseeable future. This requires a current-account surplus, sustained by sound competitiveness and a high level of savings in the economy. The prospect of a heavier provider burden is another reason for reducing the government debt.
Moreover, maintaining high GDP growth requires an increase in the supply of labour, unless productivity can be increased significantly in the future. A greater supply of labour will also ease the financing of public welfare benefits. With the recent reform of the labour market in the autumn of 1998 and amended rules for retirement from the labour market the government aimed to increase the flexibility of the Danish labour market and to ensure an increased supply of labour. So far it has been possible to achieve high employment without accelerated wage growth in view of the low unemployment. However, the influx to the labour force was modest in 1999. This illustrates how difficult it is to achieve the objective of an increase in the supply of labour. The demand for additional holiday leave and shorter working hours makes this challenge even greater.
The Danish economy has made a "soft" landing and exports have recovered strength but wage growth and inflation are high.
Footnotes
[1] OECD estimates are used if figures for the whole of 1999 are not available.
[2] Provisional statistics for Denmark's external debt at end-1999 are published at the end of March 2000.
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Version 1.0 April 2000 Nationalbanken.
Published by Danmarks Nationalbank April 2000, http://www.nationalbanken.dk