Danish Economy

A glimmer of hope

By chief economist Steen Bocian, Danske Bank

The Danish economy is in the midst of the worst crisis since World War II. Last year, GDP fell by 1.2% – indicating that Denmark was one of the first European countries to be affected by the global financial and economic crisis. This year looks like it will be even worse. Economists expect a drop in economic activity
of 2.5-3%, as a picture emerges of an economic decline worse than during the oil crises of the 1970s.

There is no doubt that Danish economy is under pressure. But that said, we are also beginning to see the first signs that the worst of the economic crisis is behind us. Private consumption showed a modest increase in the first three months of the year – and consumer confidence, which dropped sharply in autumn 2008, has started returning to more normal levels. Since global industry conditions also seem to be on the turn, we anticipate the first small shoots of economic progress in the second half of 2009.

The upturn in consumption is closely connected with the substantial drop in interest rates we have seen in recent months, especially in short-term interest rates. Since December, the interest rate on floating-rate mortgage bonds has more than halved – and although it is not record-cheap to borrow money, it is very close to it. Lower interest rates have great penetration power in Denmark. The continuously well-functioning mortgage credit market ensures that despite the credit crisis, Danes have access to financing and now also to very low interest rates. If you look at loans that Danes take out, mortgage loans dominate. On the private side, there are four times as many mortgage loans as bank loans, while on the business side mortgage loans are on a par with personal loans.

In addition to lower interest rates, economic policy is also playing a role.

A reduction of taxation of DKK 5 billion (EUR 672 million) was implemented from 1st January – and since then the government has legislated for further tax reductions next year. When added to an unfinanced reduction of taxes of almost 1% of GDP in 2010, there is a basis for good progress in private consumption over the next quarters.

But an economy that seems to be nearing the bottom does not equate with an impending turnaround for the labour market. Quite the opposite. Unemployment has already increased significantly – and will in all likelihood continue to rise for the rest of this year and next year. We probably need to reach the end of 2010 before
we can hope for growth being sufficient to stabilise the labour market. Rising unemployment naturally provides a risk that the turnaround will never come, but our assessment is that the economic policy will help ensure that it does come.

While it was difficult three months ago to see even a glimmer of hope, a picture of modest progress is beginning to emerge. That is not the same as saying the crisis has ended – but we have to start somewhere, and Denmark is likely to be one of the countries in Europe which will come through the crisis most rapidly, since the large interest sensitivity and a continuously well-functioning mortgage credit market give a much needed helping hand.