ECONOMY

SIGNS OF THE BOOM COMING TO AN END

By Department Director Steen Bocian, Danske Bank

ECONOMY: The sturdy Danish economic upswing appears to be slowly but surely petering out.

Signs of slowing growth have become more evident over the past few quarters. National accounts figures point to a relatively weak second half of 2006 with consumer spending, investments and exports slowing down.

Consumer spending actually stepped hard on the brakes during the second half of 2006. In real terms, consumer spending actually fell by 0.2%, following a three-year period during which the indicator had consistently climbed by an average of more than 1.5% per six-month period.

There is much to indicate that the decelerating consumer spending marks an actual turn away from the consumption boom in recent years and therefore should not be interpreted as if consumers are merely taking a breather in the wake of a number of years of hectic spending. Supporting this view, indicators for 2007 point to continuing weakness in consumption. Car sales are still quite high but trends are pointing downwards, retail sales have proven surprisingly weak, and consumer confidence is sliding. The slowing trends in consumer spending are following in the wake of rising interest rates and a housing market that has come to an abrupt halt. However, we are not necessarily witnessing the beginning of a hangover. Instead, consumer spending seems to be entering a phase of more moderate growth.

Possible decline in unemployment
Consumption is underpinned by the prospect of a decent increase in real wages over the next few years, and it should be kept in mind that the overall wealth situation of Danish households is still quite healthy. In addition, interest expenses after tax relative to developments in disposable incomes are still relatively low – although the trend has been pointing upwards since interest rates started to rise. We forecast a growth in consumer spending of approximately 2% this year and of about 1.5% in 2008.

Despite the lower growth rates we are still witnessing a very healthy development on the labour market. With 106,600 persons registered as unemployed in March 2007, unemployment has plummeted to the lowest level since 1974. Since unemployment started to decline in the winter of 2003-2004, nearly 80,000 people have left the dole queue. According to Statistics Denmark, employment rose by 107,000 persons during the same period. It is very difficult to say for certain how low unemployment can technically drop, but we are rapidly approaching the floor.

As previously mentioned, growth in the Danish economy appears to have peaked, causing a slight decline in demand for labour. In fact, we forecast such a large slump in growth that unemployment is expected to rise during 2008. The slightly less favourable economic trends will lead to a more severe demographic impact on the labour force. Accordingly, the outlook is for a shrinking labour force. As a result of this diminished labour force, the curbed growth will only trigger a moderate rise in unemployment. This also means that the slowing growth is not expected to be felt as a crisis.

Housing market remains unscathed
In the present situation, it appears that the Danish economy will avoid a hard landing. The housing market is expected to remain unscathed, wage developments do not look as if they will be going through the roof, and the slower economic growth will only to a moderate extent result in rising unemployment in 2008, as a shrinking labour force pulls in the opposite direction. We expect that the economy is slowly starting to shift gear down towards a growth rate of 2.1% this year, dropping to 1.6% in 2008. Given the current structures in the Danish economy involving full employment and demographic changes that are starting to bite into the economic growth, we should start getting used to sub-2% growth rates. In other words, we do not foresee any dramatic economic trends for Denmark in this forecast.