7 December 2016
"The Danish economy is in a solid upswing, and as the signs of labour shortage are becoming still clearer, the structural government budget should be brought to balance within the next couple of years so that fiscal policy will contribute to stabilising the economy."
That is the message from Governor Lars Rohde in connection with the publication of Danmarks Nationalbank's Monetary Review today.
Growth in Denmark's gross domestic product (GDP) is forecast at 1.0 per cent this year, rising to 1.4 and 1.5 per cent, respectively, in the next two years. This is a little lower than in the September forecast.
"The slightly lower growth expectations for the coming years primarily reflect a weakened outlook for Denmark's export markets," says Lars Rohde.
This year's growth in GDP is driven mainly by private consumption. In the coming years, exports are expected to make a stronger contribution to growth, along with private consumption.
Price increases for owner-occupied homes have moderated slightly but remain high, especially in Copenhagen.
"Prices of owner-occupied flats in Copenhagen are high relative to incomes and interest rates and there is a risk that price developments are being driven by self-fulfilling expectations," says Lars Rohde.
Copenhagen homeowners will be relatively more severely hit by rising interest rates than homeowners in the rest of Denmark.
"This makes the Copenhagen housing market vulnerable to sudden interest rate rises. Hence, there is a considerable risk that if the real price increases seen in recent years continue, they will be followed by falls of the same size," says Lars Rohde.
Danmarks Nationalbank also publishes its biannual Financial Stability report, which shows that credit institutions' earnings are being lifted by large reversals of previous years' loan impairment charges. This meant that in the 1st half of 2016, loan impairment charges were at the lowest level seen since the onset of the financial crisis. As losses will from time to time be incurred on part of the loan portfolio, loan impairment charges can be expected to rise at some point.
A robust financial sector is a precondition for sustainable growth. The largest institutions already meet the capital requirements that have been adopted and which will be fully phased-in by 2019. However, their excess capital adequacy may not be sufficient to meet future requirements.
Besides capital requirements, an important element of robust regulation of the financial sector is that any credit institution – be it a bank or a mortgage bank – can ultimately be resolved.
"Resolution of any institution should be possible without major negative consequences for the economy and financial stability. There is still much work to do before this element is in place," says Lars Rohde.
Enquiries can be directed to Ole Mikkelsen on tel. +45 3363 6027.