Projections of the Danish economy - how and why?

Theme on projections of the Danish economy

Abstract icon Economic projections often attract great interest – from both decision-makers and the media. Danmarks Nationalbank uses its projections of the Danish economy to issue qualified recommendations and assessments regarding Denmark's economic policy, e.g. in order to prevent imbalances. Danmarks Nationalbank's projections are based on the current economic development and are produced using, inter alia, the macroeconomic model MONA. Published 2 April 2014.

Projections offer an estimate of the development in fundamentals such as GDP, unemployment, housing market and consumer prices. Projections are for instance used for planning, assessment and ongoing adjustment of economic policy. Firms may also prepare projections as inputs for strategic decisions, e.g. about whether to make an investment or to launch a new product.

Why make economic projections?

Economic projections are an important tool in the planning and assessment of economic policy. The reason is that the projections contribute to outlining the state of and development in the economy, taking the current cyclical position as the point of departure.

Projections for the coming years can give an estimate of whether economic policy should be eased

or tightened. However, the projections are subject to some uncertainty, which highlights the difficulties in fine-tuning economic policy. So effective automatic stabilisers are essential. For example, the projections may show substantial spare capacity in the economy and no prospects of the economy adjusting for this through e.g. low wage increases, which can improve competitiveness and hence increase exports. If there is financial room, it may be appropriate to initiate measures to boost economic activity.

Conversely, the projections may show strong pressure on the production capacity of the economy and no prospects of self-adjustment. In that case, it may be appropriate to tighten economic policy, e.g. by reducing public-sector demand or raising taxes.

Why does Danmarks Nationalbank make projections?

One of Danmarks Nationalbank's main tasks is to plan monetary policy in order to maintaining a fixed exchange rate vis-à-vis the euro, thereby contributing to price stability. Consequently, Danmarks Nationalbank must identify in good time whether the economic development and economic policy entail risks in terms of price development, credit development and the stability of the financial system in order to counter such risks.

That is why Danmarks Nationalbank regularly produces cyclical assessments, i.e. analyses and assessments of the economic situation, combined with economic projections so as to keep track of the current state of and development in the Danish economy. This allows Danmarks Nationalbank to issue qualified recommendations and assessments regarding Denmark's economic policy in order to prevent e.g. imbalances.

The projections are also used in Danmarks Nationalbank's semi-annual stress tests of the largest banks in Denmark. The stress tests provide the basis for a general assessment of the resilience of Danish banks in terms of capitalisation in various macroeconomic scenarios.

Find more information about Danmarks Nationalbank's latest assessment of the financial stability in Denmark: Financial stability reports.

Projections are based on the current cyclical position

Multiannual economic projections require a detailed description of the current cyclical position. In simplified terms, it is necessary to know where you are before you can say where you are going.

This includes an assessment of capacity pressures in the economy – meaning whether there is a shortage of labour and whether firms have ample production capacity or capacity pressures exist. In addition, an analysis of the momentum and drivers of the economy is prepared. This may include, for instance, upswings abroad resulting in an increase in exports and thus output and employment in Denmark.

It is necessary to estimate current developments

Cyclical assessments may require quite extensive statistical material. But the challenge is that some economic statistics are only available with a lag. A case in point is the national accounts, which are released in a preliminary version approximately 60 days after the expiry of the quarter. However, some statistics are available sooner and on a monthly basis, so they can be used for estimating the current development. This is known as nowcasting.

When Danmarks Nationalbank prepares its projections, Statistics Denmark has not always published the national accounts for the most recent quarter. In that case, Danmarks Nationalbank must forecast the development using the NARES model, among other tools.

How does Danmarks Nationalbank make multiannual projections?

Danmarks Nationalbank applies its MONA model to make projections of the Danish economy and other economic calculations. The name MONA is a contraction of "model" and "Nationalbank". MONA is a quarterly, macroeconomic cyclical model describing demand components, output, employment, wages and prices.

MONA is a tool used in Danmarks Nationalbank's forecasting of economic developments. The model can provide an indication of where the economy is heading, based on the estimated relations in the preceding years and a number of assumptions.

It should be borne in mind that the relations in the model will always be simplified as it is impossible to create a model that takes all relevant aspects of the economic reality into account. So it is up to the forecaster to determine the final projection. Such an assessment includes information that is not contained in the model, e.g. 'soft' indicators of business and consumer confidence.

Ultimately, all projections are, to a considerable extent, based on sound judgement. In this connection, using a macroeconomic model such as MONA ensures that the many pieces of information and statistics present a coherent picture.


 Find more information about MONA: MONA - a quarterly model of the Danish economy.

Economic projections are subject to considerable uncertainty

Projections of economic development will always be subject to considerable uncertainty. This applies especially at times of strong fluctuations. For example, practically no economists, either in Denmark or internationally, saw that a worldwide crisis would erupt in 2008-09.

In general, it may be difficult to identify the reasons why the current development may deviate from the historical trend. And if it is found that it is because the economy is heading in an unsustainable direction, it is very difficult to predict when and how an adjustment will take place.

Moreover, the Danish economy depends very much on developments in the outside world. Consequently, a projection of the Danish economy is partly based on an underlying assumption of economic developments abroad. This forecast is subject to strong uncertainty, influencing the projection of the Danish economy. In the chart, Danmarks Nationalbank's forecast error of annual GDP growth is broken down by the most important factors, i.e. actual relative to expected development in the international economy, fiscal policy and financial conditions. It is seen that the forecast errors are to a high degree attributable to the assumptions for the development in the international economy.


Moreover, the projections are often used for assessment of the current economic policy. This includes projection of where this policy will take the economy if the necessary precautions are not taken in time.

Danmarks Nationalbank's projection represents the scenario estimated to be the most likely one for the Danish economy given the current economic policy. Consequently, Danmarks Nationalbank's projection will – and must – not include measures that are likely, but have not been finally decided yet. This also means that the projections may not match the actual development. The part of the forecast errors in the chart that is due to fiscal policy and financial conditions should be viewed in this light.

It is important to maintain a broad view of the economy, as the picture may be distorted if only one measure is used. GDP summarises the assessment of economic activity, while unemployment provides an indication of the state of the labour market. At the same time, unemployment may be an indicator of the direction of wage and price formation, which is reflected in the rate of inflation. Generally, forecasters should be careful not to focus on GDP only, since especially the early compilations of GDP development are subject to considerable statistical uncertainty.

Several institutions produce projections of the Danish economy

A number of Danish and international institutions produce projections of the Danish economy. For example, ministries produce projections in connection with the government's Economic Surveys, which form the basis for e.g. the government's Finance Bill, and for the medium-term projections that are included in Denmark's annual convergence programme for the EU. The Secretariat and Chairmanship of the Economic Council also produce cyclical assessments in their semi-annual reports, and so do banks and non-governmental organisations.

Among the international organisations, the IMF, the OECD and the European Commission, among others, produce projections of the Danish economy.



Danmarks Nationalbank publishes its cyclical assessment and projection of the Danish economy on a quarterly basis in the chapter "Current Economic and Monetary Trends" in its Monetary Review link.

 Danmarks Nationalbank's Board of Governors holds a press conference to mark the publication of the Monetary Review. At the press conference, they present Danmarks Nationalbank's cyclical assessment and projection of the Danish economy, among other issues.



Danmarks Nationalbank's macroeconomic model MONA was constructed in the late 1980s and has been revised regularly since then.

MONA is a quarterly model with focus on capturing key economic relations in the short term. They are described by means of equations estimated on quarterly figures for the Danish economy dating back to the early 1970s.

The model's economic relations thus reflect the average cyclical patterns over the last decades.

MONA - a quarterly model of the Danish economy