Progress in the Danish economy – but public finances are weakened

The Danish economy is improving. Since mid-2013 almost 45,000 persons have gained private employment, and unemployment is down. Progress in the labour market is expected to continue, and GDP growth will rise over the forecast period. Public finances are, however, in a worse condition than previously expected. Hence, it has been necessary to reduce the fiscal room for manoeuvre in 2016. This is documented in the Economic Survey, announced by finance minister Claus Hjort Frederiksen.

While Danish growth is overall deemed to be on track, public finances look weaker than expected in the May survey. In order to comply with the limit for the structural deficit in the Budget Law, the fiscal room for manoeuvre has been reduced by DKK 3 bn. in 2016. In the coming years, the deficit in public finances must be reduced, and the scope for fiscal policy will be narrow. This must, however, be seen in context of it being appropriate for fiscal policy to adapt to an improving economy, and thus be gradually tightened. 

Minister of Finance Claus Hjort Frederiksen says:

It is encouraging that Danish growth is on track and that more Danes are entering employment. Private sector employment has grown by almost 45,000 people since the middle of 2013 – a trend that is expected to continue over the coming years, supported by recent year’s reform effort. Turning to public finances, the picture is less positive than expected. New information implies that the fiscal room for manoeuvre in the budget bill for 2016 is DKK 3 bn. less than previously expected. As a responsible government we have to take stock of this in order to ensure confidence in the Danish economy and ensure that fiscal policy remains on track.

The recovery of the Danish economy is well under way, and even though the improvement is not without some detours, the foundation for accelerating growth is present. Progress in the labour market and rising house prices are contributing to increased confidence among households. This, together with real wage gains, provides a sound basis for increasing consumption. However, growth abroad continues to be the main driver of growth in the Danish economy over the forecasting horizon, and particularly the recovery in the euro area is expected to benefit exports.

Against this backdrop, growth is expected to pick up from 1.1 per cent last year to 1.5 per cent this year and 1.9 per cent in 2016. Compared to the Economic Survey from May 2015, growth has been revised down slightly both this year and the next. This is partly due to the fact that a number of indicators point to a temporary weakening of consumption in the second quarter of 2015.    

Facts: Highlights from the Economic Survey, August 2015:

• The Danish economy has grown seven quarters in a row. The prerequisites for further growth in demand and production in the coming years are present. GDP- growth is estimated to be 1.5 per cent in 2015 and 1.9 per cent in 2016 as a result of progress both domestically and in export markets. In 2015, growth has been revised down slightly due to a temporary weakening of domestic demand in the spring. The minor revision in 2016 is a result of a lower scope for public consumption.
  
  
• Exports are expected to be the main driver of growth, supported in particular by progress in the euro area. Here, growth has proven to be robust against the turmoil in the Greek economy during the summer as opposed to the situation in 2011 and 2012 where turmoil strongly affected several other southern European countries.
  
  
• Growth in Danish exports is also supported by strengthened competitiveness, which is partly a result of previous years modest wage increases and productivity gains. Currently, competitiveness is improved further by the weakening of the euro, which makes Danish goods relatively cheaper compared to goods from countries outside of the euro area such as the US and Great Britain.
  
  
• During the forecast period, domestic demand is expected to rise, with increasing private consumption and investments as a result. Growth in private consumption partly reflects increasing real wages and progress on the labour market. Along with increasing house prices across the country this increases financial security for households and forms a sound basis for an increasing consumption.
  
  
• House prices have continued to increase in all regions in 2015 – not only in the capital. This is partly due to the very low interest rates but also increasing income and employment. It is, however, especially prices on owner occupied apartments in the big cities, notably Copenhagen, which have surged over the past years. This calls for increased attentiveness, as a longer period with a steep price development increases the risk of a house price bobble.
  
  
• Since mid-2013 labour market conditions have improved. This is expected to continue over the forecast horizon, with gains of 22,000 persons in 2015 and 27,000 in 2016. Structural employment has gone up considerably since 2008, primarily as a result of reforms. Employment is therefore able to increase in coming years without resulting in serious bottlenecks and general labour shortages.
   
• In recent years, fiscal policy has been expansionary in order to support growth and employment. As growth in the Danish economy picks up, there is need of a gradual withdrawal of the expansionary policy and to adjust fiscal policy to the new economic situation. The need is further emphasised by the continued accommodative monetary policy. 
  
  
• New statistical information since the May survey has led to a weaker outlook for fiscal policy than previously expected. In order to comply with the limit for the structural deficit set by the Budget Law, the fiscal room for manoeuvre has been reduced by DKK 3 bn. In 2016. 

Read more about Economic Survey, august 2015.