European Commission – European Economic Forecast Spring 2012 for Denmark

 

Forecasts for Denmark	2010	2011	2012	2013
GDP growth (%, yoy)	1,3	1,0	1,1	1,4
Inflation (%, yoy)	2,2	2,7	2,6	1,5
Unemployment (%)	7,5	7,6	7,7	7,6
Public budget balance (% of GDP)	-2,5	-1,8	-4,1	-2,0
Current account balance (% of GDP)	5,5	6,5	5,2	4,9

DENMARK Subdued growth sustained by domestic demand

GDP growth in Denmark reached 1% in 2011 after stagnating during the second half of the year as the slowdown of the global economy took its toll. The improvement in confidence indicators and readings for exports in the first quarter of 2012 suggests that a gradual pick-up of activity is underway. However, as the external environment has deteriorated since last autumn, real GDP growth is expected to continue at a slow pace, reaching 1.1% in 2012 and 1.4% in 2013. This implies a downward revision of ¼ pp. in both years compared with the autumn forecast.

Driven mainly by domestic demand, and supported by the government’s “kick-start” stimulus package as well as the pay-out of voluntary early retirement pension (VERP) contributions, Denmark’s economic performance is, nevertheless, projected to be among the best for EU Member States this year. Towards the turn of the year, the recovery is expected to gain momentum slowly in line with a general improvement in the economic situation in the EU. Fiscal consolidation efforts in 2013, on the other hand, will act as a drag on growth.

Public initiatives support domestic demand

Given the high degree of economic uncertainty, the need for deleveraging and the tightening credit conditions, the household saving rate remained high in 2011 and the corporate saving rate even increased. As credit conditions are expected to remain tight over the forecast horizon, gross fixed capital formation will continue to be propped up largely by public initiatives such as the government’s investment-driven “kick-start” and large-scale infrastructure projects, while low interest rates and an improving economic environment should gradually support firms’ propensity to invest towards the turn of the year and in 2013.

Following the adoption of the retirement reform by Parliament, contributions to the VERP scheme are being reimbursed in 2012. Assuming that part of this reimbursement is consumed rather than reinvested in private pension funds, private consumption is expected to accelerate during the course of this year and to continue to grow at a moderate pace next year as households’ real disposable income improves slowly. However, since real wage growth is now foreseen to be negative this year and the outlook for growth is more subdued – also including a fragile housing market – private consumption growth is now expected to be more moderate throughout the forecast horizon. Nevertheless, the yearly growth rate for 2012 is set to remain at 1.4% as in the autumn forecast due to the higher-than-expected carry-over from 2011.

Elevated inflation in 2012

Real wages are likely to be contained by elevated inflation and a very moderate outcome from the spring round of private sector wage agreements. As a result of the sustained significant increase in energy prices over the past year as well as the effects of tax hikes, HICP is projected to be around 2.6% this year before dropping to 1.5% in 2013.

Moderate outlook for exports

Although moderate wage growth should support Denmark’s competitiveness, export growth is projected to be significantly lower in 2012 than in 2011 due to the less favourable external environment. However, the large share of non-cyclical goods, e.g. pharmaceuticals, in Danish exports is likely to sustain export growth to some extent and limit the loss in export market shares. Furthermore, recent figures seem to suggest that Danish companies are beginning to take some advantage of the high growth in emerging markets. If this tendency continues, export performance could turn out better than projected. Due to the resilience of domestic demand, import growth should remain strong and the current-account surplus is set to decline, reflecting lower savings in the private sector, by 2013.

Continued stagnation in the labour market

The subdued growth outlook is unlikely to allow for a pick-up in private employment until next year whereas public employment should already start to head up somewhat this year in line with public consumption. The gradual improvement in economic conditions and employment prospects is likely to encourage more people to enter the labour market thereby lifting labour supply. Consequently, unemployment should remain broadly unchanged over the forecast horizon.

Budget affected by one-off and “kick-start”

Overall, the deficit for 2012 is revised down by 0.4 pp. compared with the autumn forecast to 4.1% of GDP. The revision implies that the negative budgetary impact of the “kick-start” (0.4% of GDP) and lower-than-anticipated GDP growth will be more than offset by higher tax revenues. In particular, expected revenues from the pension yield tax and North Sea activities, benefiting from a higher oil price, are higher than in the autumn. The widening of the general government deficit from 2011 to 2012 reflects, in addition to the stimulus package, the absence of the type of extraordinary pension yield revenues that affected the government balance in 2011, as well as the lump sum reimbursement of VERP contributions estimated at almost 1% of GDP. In the absence of this one-off measure and on the back of government consolidation, the budget deficit is projected to fall back to 2.0% of GDP in 2013.

The structural balance is set to deteriorate from 0.2% of GDP in 2011 to -1.0% of GDP in 2013. However, the structural balance includes very volatile revenue items such as pension yield tax and North Sea oil revenues. Furthermore, the low current estimates of potential output growth may overstate the contribution of the economic cycle to the improvement of the budget balance. From a bottom-up perspective, net discretionary measures are estimated to yield a consolidation of around 1½% of GDP over the period 2011-13.

Part of the budget deficits in 2012-13 will be financed by reducing the government’s account with Danmarks Nationalbank and will only affect the net and not the gross government debt. Thus, although the country is running deficits, Denmark’s gross public debt is projected to fall from 46.5% of GDP in 2011 to 42.1% in 2013.