Risks associated with the current upswing in the Danish economy

Authors Pedersen, Erik Haller; Jensen, Rasmus Mose; Hvolbøl, Tina Saaby
Subject Danish Economy; Economic activity and employment
Type Monetary Review  
Year 2015
Published 7 July 2015
Link to publication Monetary Review, 2nd Quarter 2015
Danmarks Nationalbank's projection expects a steady growth scenario, entailing that the Danish economy will return to a normal cyclical position over the next few years. However, in several previous upswings, i.e. in the 1980s, 1990s and 2000s, demand rose significantly more strongly than projected. Two scenarios are described in the article. In one scenario, the currently low consumption and investment ratios are assumed to normalise in the near future, and house prices are assumed to accelerate slightly more than in Danmarks Nationalbank's projection. In the other scenario, house price increases become self-reinforcing. This will result in a strong and fast increase in demand in the economy. An increase in the labour market participation rate and a fall in unemployment to structural levels will not be enough to prevent pressures on the labour market and the economy in general. This may result in an extensive shortage of labour. At best, the first scenario will entail a soft landing, while the second scenario implies a substantial risk of an abrupt downturn.