Solid momentum in the Danish economy –but some clouds on the horizon

By Steen Bocian,
Chief Economic Analyst,
Danske Bank

The economic upswing in Denmark is becoming selfsustaining. At 2.1%, economic growth was a little above trend last year, though the labour market was rather slow to react to the improved economic conditions. However, this is quite normal, as companies are often hesitant to acknowledge the sustainability of an upswing and employ more workers. The Danish business community is now, though, in no doubt that a solid upswing is underway. Business confidence has been climbing and is currently at a very high level. And with a natural limit as to how much faster companies can allow their employees to run, the labour market has strengthened considerably in recent quarters. The trend in unemployment has definitely turned down and the number of people in work is on the rise – 30,000 people have found employment over the past 18 months. The rise in employment is increasing both household consumption and corporate investment, which in turn is creating more jobs. The Danish economy now finds itself in a virtuous circle.

     On top of this, the export sector has been showing signs of incipient growth. Exports have long been languishing due to the sharply weakened dollar that prevailed from 2002 to 2004. Since New Year, though, the tide has turned on the financial markets and the dollar has strengthened by around 10%. This has meant Danish companies becoming increasingly competitive and at the same time has helped spur European growth a little. Overall, exports (current prices) jumped 9.2% in the first half of 2005 compared to the same period last year. If exports can maintain their momentum, the result will be a substantially more balanced upswing in the Danish economy, and not one that is solely dependent on domestic demand. This will mean not only a less vulnerable upswing, but also one that is much more sustainable, as the sharp growth in private consumption observed in Denmark must be expected to gradually slow. This is because consumer appetite for durable goods will to some extent become satiated, while the significance of more temporary growth impulses, such as last year’s tax cuts, will fade.

     There are, however, a few clouds on the horizon. Hurricane Katrina’s ravaging of the Mexican Gulf coast may impact the global economy in a way that puts a damper on the otherwise very positive outlook for growth in the Danish economy. Hurricane Katrina has, first and foremost, meant a leap in already very high energy prices –especially gasoline. This will diminish the purchasing power of Danish consumers and hit private consumption growth.

     The greatest concern with regard to the high energy prices is, though, primarily the scale of the impact on the global economy. Should a lengthy slowdown in US growth materialise, it might have a ripple effect that could ultimately undermine Danish exports before growth in the sector has really taken hold. Currently, the US economy is not expected to be blown off course, it will merely see a temporary slowdown in the fourth quarter of this year. If this forecast holds, Denmark will experience slightly lower growth towards the end of the year, mainly due to more muted growth in exports. However, this is unlikely to threaten the present economic upswing.