The Danish economy is losing momentum

BY SENIOR ECONOMIST FRANK ØLAND HANSEN, DANSKE BANK

The years of high growth in Denmark came to an end in 2007. Growth came down from almost 4% in 2006 to 1.8% in 2007, which is close to the norm for Denmark. The slowdown was broadly based. Private consumption growth slowed to around 2.7% in the aftermath of a consumption party that lasted for years. Investment and export growth slowed down too.

Looking ahead, the picture is of further slowing. The global economy is in a vulnerable position and, at the same time, the Danish economy is running very close to - if not above - its capacity limit. Given this, we expect that Denmark faces a couple of years with growth below trend and slightly increasing unemployment. Danish GDP growth is projected to slow down to 1.5 % this year and 1.4 % next year.

RISING UNEMPLOYMENT

Unemployment is currently at a historically low level – just 2.1% of the labour force. This is a noteworthy achievement – and is partly a result of Denmark having a very flexible labour market. However, accelerating wage growth clearly indicates that unemployment has now gone well below the structural level (private sector wage growth has increased from 3.2% a year ago to 4.6% today). There are therefore grounds to believe that unemployment will begin to rise in the coming years - unless economic reforms are enacted that could bring structural unemployment further down. The rise in unemployment is mainly a consequence of the lost competitiveness that will result from increasing wage pressures. We foresee that unemployment may increase to about 2.6% at the end of 2009 - this is, however, still a very low level and is as such no cause for alarm.

FALL IN HOUSING INVESTMENTS

The slowdown in the housing market and the prospect of slightly lower house prices play a more important role than developments in the financial markets for the relatively subdued consumption growth we expect to see in the coming years. However, expected consumption growth slightly below 2% does not add up to a hangover after the consumption party. The housing market slowdown is also reflected in other areas of the economy. For instance, there is an even clearer effect in housing investments. Growth here already saw a marked downturn in 2007 - and we expect an actual fall in housing investments in 2008. New projects will be put on hold for as long as the supply of housing is large and as long as uncertainty on the direction of housing prices continues to haunt the market.

LOSING MOMENTUM

The surplus on the current account has been getting thinner in the past couple of years: from DKK 68bn in 2005 to just DKK 17bn in 2007. Put another way, the current account surplus has been falling by DKK 2bn on average every single month for the past two years. Should the surplus continue to erode at this pace, it will be gone by September this year. In fact, if one subtracts oil exports from the figures, the current account is already in the red. It is, of course, quite normal during an upswing for domestic capacity constraints to push exports down and at the same time pull imports up - and in the process put the current account under pressure. Going forward, however, we see a less gloomy picture. The current account surplus should remain above DKK 10bn in both 2008 and 2009.

The Danish government has just agreed on a fiscal budget for 2008 – somewhat later than usual. A budget was first presented in autumn 2007, but was not passed due to the snap election in November. The fiscal budget is slightly expansive. The current economic situation – characterised by a shortage of labour – would suggest the need for a tight fiscal policy. On the other hand, it must be said that as described above, there are a number of signs that the Danish economy is beginning to lose some momentum, and as such a fiscal tightening now could well turn out to be too late. The agreement includes a job-plan, which should help to boost employment, in particular by making it more attractive to work for the 60-64 year olds.