Progress in the Danish economy calls for a less accomodative fiscal policy stance


The Danish economy has been strengthened through 2015, and both GDP and employment have grown. The economy is not booming, but growth has been strong enough to drive a significant improvement in the labour market, and employment in the private sector has increased by 66,000 persons since the turnaround in 2012. As the business cycle continues to improve, the need for a gradual reversion of the accommodative fiscal policy grows. This is documented in the Economic Survey, released by the finance minister Claus Hjort Frederiksen today.

The recovery is moderate, but there is a solid basis for further growth in the coming years – both in domestic demand and exports. Hence, it is essential that fiscal policy is adapted to the new business-cycle stance – i.e. tightened relative to the accommodative starting point. This will support a sustainable recovery, and is a fundamental prerequisite for sound public finances. 

Minister of Finance Claus Hjort Frederiksen says: 

I am pleased that the Danish economy is growing, and with an expected increase in employment of over 80.000 persons over the coming years, the recovery will benefit many Danes. The scope for public finances remains tight, and as the economic recovery strengthens, fiscal policy should become less accommodative. Hence, there will be limited fiscal room for manoeuvre in the years ahead. That is responsible economic policy. Hereby, we are both supporting a sustainable recovery, and the reduction of public deficits towards the target of balance in 2020. The first steps have been taken with the budget for 2016, and we will continue this work in the coming years.

Growth has become more broadly based than before, and private consumption is increasingly contributing to the improvement in the Danish economy. Income growth and the improvement in both the labour market and the housing market have strengthened households’ finances, and thus provided a sound basis for future consumption growth. Danish consumers and businesses are not the only source of increasing demand, growth abroad contributes as well. Particularly, the improvements in Europe are expected to provide better export opportunities for Danish businesses. 

Against this backdrop, GDP growth is expected to increase from 1.4 per cent this year to 1.9 per cent in 2016 and 2.0 per cent in 2017. With the strengthening of public finances that has been passed with the budget for 2016, the structural public deficit is reduced to 0.4 per cent in 2016. 

Facts: Highlights from the Economic Survey, December 2015

The Danish economy has been growing for the last two years. The prerequisites for further growth in demand and production in the coming years are present. GDP- growth is estimated to be 1.4 per cent in 2015, 1.9 per cent in 2016 and 2.0 per cent in 2017, as a result of progress both domestically and in export markets. The forecast entails a minor downward revision of growth in 2015 and an unchanged growth estimate for 2016 compared to the assessment from September

The growth in the Danish economy implies a narrowing of the output gap over the forecast period. In 2017 the output gap is expected at -0.7 per cent of GDP compared to 1.8 per cent in 2014. The employment gap is also expected to be educed. Hence, there will gradually be fewer available resources in the Danish labour market.

The narrowing of the output gap implies that the accommodative fiscal policy of recent years must be gradually reverted and normalised. Since monetary policy is expected to remain very expansionary over the forecast horizon, there will all else equal be a greater need for a tightening of fiscal policy. The structural deficit is expected to be reduced from 0.7 per cent of GDP in 2015 to 0.4 per cent in 2016, and in the coming years it must be reduced gradually towards the target of balance in 2020. 

Exports are expected to continue to be a significant driver of growth and are particularly supported by progress among Denmark’s largest trading partners, including the euro area. At the same time, Danish companies continue to benefit from the low value of the Krone. 

In the forecast period, domestic demand is expected to rise due to increasing private consumption and investments. Private consumption growth reflects rising real wages and progress in the labour market, among other things. Along with increasing house prices across the country, this strengthens household finances, hereby forming a healthy foundation for increasing consumption. Investments are supported by low interest rates and rising demand for companies’ products. 

The housing market is improving with increasing prices and sales in large parts of the country. The sharp decline in interest rates in the beginning of 2015 contributed to a steep increase in house prices, particularly in major cities, and even a noticeable increase in interest rates in the second half of the year has not been able to curb house price growth, albeit they have been more subdued. Over the forecast period prices are expected to continue to rise, however, at a slower pace than this year.  

Since late 2012 there has been progress in the labour market. It is expected to continue in the forecast period, where over 80,000 persons are expected to enter into private employment. Employment may rise in the coming years without it leading to serious bottlenecks or general labour shortages. This owes to the fact that there is expected to be a significant increase in structural employment, which in particular should be viewed in light of recent years’ reform effort.

Read more about the Economic Survey december 2015

Read more about Public Finances, december 2015