DANISH ECONOMY DOING JUST FINE

The Danish economy is in excellent condition, with high growth, low unemployment and solid current account and budget surpluses. If Danish policymakers can seize the opportunity, a historically high number of Danes might be able to find employment.

     After the slow growth period of 2001-2003, the Danish economy has been growing at a healthy rate since the summer of 2003, driven inter alia by fiscal expansion. The economy grew 2.1% in 2004, and the latest economic data suggest it might expand nearly 3% this year. Consumer spending has been the main growth driver but, lately, exports have also done well, surging more than 8% in the first half of 2005. Unemployment has fallen nicely against the backdrop of high economic growth and is rapidly nearing a level where it cannot slide much further without prompting a risk of labour shortages in the business sector.

     The economic recovery has now lasted so long and gained such momentum that it is bound to change gear. We should no longer expect the same high growth rates as we have seen so far, but this is nothing to lament. Denmark’s alreadytight labour market does not leave room for much in the way of strong growth.

     Tightness in the labour market and buoyant growth are the only real threats to the Danish economy at the moment. Is the economy in danger of overheating where the demand for labour pushes wages so high that they hurt competitiveness and exports? And could this force the government to tighten up fiscal policy in order to head off current account pressure, as happened last time in 1998?

     It’s difficult to unequivocally say when the Danish economy will begin to experience capacity restraints – and even more uncertain is how. When the economy has overheated in the past, the symptom has always been a serious deterioration in the current account. In both 1986 and 1998, the current account weakened significantly owing to high domestic growth and poorer competitiveness.

     The present economic upswing, though, has not really been reflected in the current account. The current account surplus looks likely to amount to more than 2% of GDP both last year and this year – and, if anything, the surplus is heading upwards. Because of the handsome current account surplus, Denmark’s foreign debt is likely to be replaced by wealth creation relative to foreign countries.

     Denmark’s position as a net exporter of oil plays an important role in the surplus – naturally, the surplus is sharply boosted during periods of high oil prices. A second – and perhaps even more important –factor is that the past 20 years of economic reform have reduced the imbalances in the Danish economy. Because of this, the current account no longer comes under the same pressure as earlier when the economy is surging ahead.

     So any capacity problems will most likely show themselves elsewhere. Shortages of qualified labour will come to play a more important role than previously, and these shortages will probably generate higher wage pressures. But pressures will build only slowly, so the primary effect, we believe, will be that businesses will have to forego orders more or less voluntarily, since they will simply not be able to fulfil them. Also, pressure to relocate jobs to other countries may increase.

     The robust condition of the Danish economy means an overheating will not necessarily have such dramatic consequences as seen in the past – but even without them, there is good reason to avoid an overheating. Continued expansion in its economy has given Denmark a unique chance to integrate more marginalised sections of the community into the labour market. This would require reform of the labour market and tax policies but if Denmark succeeds, it could lay the foundation for several more years of strong economic data.

A PRINCE IS BORN
On Saturday 15 October, Denmark’s Crown Princess Mary Elisabeth gave birth to a son who will be the second in line to the Danish throne. The newborn is the first child of Crown Prince Frederik and Crown Princess Mary. The royal couple married in Copenhagen in 2004.

WORLD’S 4TH MOST COMPETITIVE ECONOMY
Denmark has moved up one position to rank 4th of 117 economies surveyed in the World Economic Forum’s Global Competitiveness Report 2005-2006 In a study which assessed 117 economies worldwide, Denmark moved up to 4th spot to rank among the world’s elite.

     Finland takes pole position again this year, with the US, Sweden and Denmark completing the leading quartet. Not only all the Scandinavian countries, but the entire Nordic Region (Denmark, Norway, Sweden, Finland, Iceland) are among the top 10.

     Augusto Lopez-Claros, chief economist and director of the World Economic Forum’s Global Competitiveness Programme comments on the high ranking of the Nordic countries: “In many ways they rank among the most competitive economies in the world, with world class institutions and some of the highest levels of per capita income in the world”. The rankings are drawn from a combination of hard data, publicly available for each of the economies studied, and the results of the Executive Opinion Survey, a comprehensive assessment conducted by the World Economic Forum, together with its network of partner institutes.

PLENTY OF OIL AND GAS
Figures from the Danish Energy Agency show there is a lot more oil beneath Danish territory than previously thought. So far the expectation has been that Denmark would be self-sufficient in oil until 2014. The new calculations show that Denmark will be self-sufficient in both oil and natural gas until 2025. In its most recent forecast, The Danish Energy Agency estimates that total oil production in the next 20 years will be 54% more than previously calculated. The forecast takes into consideration the discovery of more oil and gas fields in the North Sea and constant development of new technology for oil and gas extraction.

DANISH BUDGET SURPLUS HIGHEST IN THE EU
In 2004, Denmark registered the highest surplus on the national budget of all 25 countries in the EU at 2.3% of GNP. Besides Denmark, only four other countries had surplus on the national budget: Sweden, Finland, Estonia and Ireland. 10 countries failed to comply with EU requirements that the national budget deficit must not exceed 3% of the country’s GNP. Germany, Italy, France and Greece are among the ten countries. In population terms, these four countries alone make up 55% of the entire Eurozone.