Short term forecast

05-12-2002

Since the beginning of 2001 the international economy has experienced relatively low growth rates. This downturn in economic growth has been followed by a substantial expansion in both fiscal and monetary policy especially in USA, but also in Europe. The expansion of economic policy has together with automatic fiscal stabilisers averted a stronger decline in the international growth rates, although also postponed a restoration of private and public balance sheet problems. The growth rates of GDP in USA and EU are expected to be moderate in 2002 – around 2.3 per cent in USA and 1.0 per cent in EU.

The stock market decline has reduced consumer and business confidence. Hence, the recovery of the global economy has been postponed and is now expected to gather momentum later in 2003.

As a result the growth rate of GDP in 2003 in both USA and EU has been revised downward by around ¾ percentage points to 2.3 per cent and 2.0 per cent respectively, cf. table 1.1 .

 

Table 1.1. A comparison between the present forecast and the previous forecast in selected areas.

	2001	2002		2003		2004
		Aug.	Dec.	Aug.	Dec.	Dec.
	Percentage change
GDP growth USA	0.3	2.3	2.3	3.0	2.3	2.8
GDP growth EU	1.5	1.1	1.0	2.6	2.0	2.6
Denmark:
GDP growth	1.0	1.5	1.5	2.2	1.8	2.1
Private consumption	0.8	2.3	2.4	2.3	2.2	2.4
	Percentage change
Consumer prices, ............................	2.4	2.3	2.4	1.8	2.0	1.8
Hourly earnings, private sector	4.2	4.1	4.1	4.0	3.9	3.7
	1.000 persons
Unemployment	145	144	146	142	155	150

Source: Statistics Denmark, EU-Commission, and own calculations.

In 2004 the growth rate is estimated to reach 2.8 per cent in USA and 2,6 per cent in EU.

In Denmark, real GDP is expected to increase by 1.8 per cent in 2003 following a moderate growth of 1.5 per cent in 2002, cf. figure 1.1a . The estimate for 2003 has been revised downward by 0.4 percentage points compared to the Economic Survey, August 2002. This is mainly due to a downward revision of growth in net exports and fixed business investments. Growth in 2004 is forecast at 2.1 per cent which is a little above the estimated future trend growth.

Figure 1.1a. Real GDP growth in Denmark and EU.

Figure 1.1b. Growth in private consumption expenditure in Denmark and EU.

 

Source: Statistics Denmark, EU-Commission, and own calculations.

GDP components

Following three years of stagnation, private consumption is expected to increase by around 2¼ per cent annually in 2002, 2003, and 2004, cf. figure 1.1b . Private consumption is therefore to a large extent expected to be the driving force of domestic demand in the forecast period.

The relatively strong growth in private consumption growth in 2002 is among other things due to relatively high growth in retail sales and passenger car registrations, cf. box 1.1 .

The outlook for private consumption is also related to a comfortable financial situation of Danish households. Total private savings and financial wealth are still at relatively high levels, indicating that the short-term growth prospect rests on solid ground. This is emphasized by the continuous surpluses on the external current account.

 

Box 1.1. Composition of private consumption, 2002-2004.

The overall growth of private consumption remains unchanged in 2002 compared to the survey in august. However, the composition of the consumption growth is different is due to a higher increase in the sales of retail products and goods, but a lower sale in services etc., cf. table a. Based on an analysis of structural effects on car sales for the next ten years the present low level of new car registrations is due to three factors: the age distribution of the car park, the expected growth in population in the near future and the historical increase in number of passenger cars per head. On this basis and due to the expected development in user cost, interest rates etc. car sales are expected to increase by 5-6 per cent in 2003 and 2004, which supports the increase in the overall private consumption over the period. The “border trade-package” will lower prices on especially alcohol and cigarettes from October next year and will imply an increased domestic sale of these products. Hence, the overall real growth in the sales of beverages is expected to increase by 6 per cent in 2004, cf. table a. Tabel a. Real growth in private consumption and some components.   2001 1991-2001 1) 2002 2003 2004 Aug. Dec. Aug. Aug. Dec.   Bill. Dkr. Percentage change Private consumption 631 1,8 2,3 2,4 2,3 2,2 2,4 Of which               Retail sales 232 2,3 2,7 3,4 2,4 2,5 3,3 Of which               - Beverages 36 0,3 1,7 1,0 1,8 2,5 6,0 Car sales 19 1,0 20,0 22,0 7,0 6,0 5,0 Services 163 1,8 2,1 0,3 2,5 2,0 2,3 Others 217 1,3 0,0 0,8 1,4 1,6 1,1 1) Average for the period 1991-2001. Source:ADAM´s data bank and own calculations.

Furthermore, employment prospects are good and real disposable income of households is expected to increase by 1.7 per cent in 2002 and 2.1 per cent in both 2003 and 2004 [1] .

Public consumption is expected to show real growth of 1.3 per cent in 2002, cf. table 1.2 . The estimate is based on the Fiscal Budget for 2002, which was passed by Parliament in March 2002. Based on the Budget draft for 2003 and an agreement with local governments real public consumption is assumed to grow by 0.7 per cent in 2003. Public investment is estimated to increase by 2.0 per cent in 2002 and remain unchanged in 2003.

For 2004 a technical assumption is applied for public consumption growth of 1.0 per cent and public investment growth of 2.0 per cent in line with the medium targets. See section 2.

Table 1.2. Use and supply of goods and services.

	2001	1999	2000	2001	2002	2003	2004
	Bill. Dkr.	Percentage changes from previous year
Private consumption	631.3	0.2	-0.3	0.8	2.4	2.2	2.4
Government consumption	343.0	1.8	0.6	1.2	1.3	0.7	1.0
Government investment	23.5	2.5	6.7	3.5	2.0	0.0	2.0
Residential construction	52.8	2.5	11.0	-13.5	-4.0	1.0	2.0
Fixed business investment	207.8	0.4	11.1	3.0	1.5	2.7	3.8
Stock building 1)	-0.1	-1.3	0.2	0.4	-0.1	0.0	0.0
Total domestic demand	1258.3	-0.5	2.6	1.1	1.6	1.9	2.3
Exports of goods and services	613.0	10.8	11.5	3.7	2.8	3.8	5.8
Of which manufactures	284.0	7.5	12.8	2.6	4.5	5.2	7.4
Imports of goods and services	526.8	3.3	11.2	4.3	3.2	4.3	6.8
Of which goods	379.6	3.7	9.0	1.8	3.5	4.5	5.5
Gross domestic product	1344.5	2.3	3.0	1.0	1.5	1.8	2.1
GDP at factor costs	1156.5	2.7	3.6	1.2	1.2	1.9	2.1
Of which in private non-agricultural sector	772.3	2.9	5.4	2.6	1.4	2.2	2.5
GDP per capita (1.000 Dkr.)	250.8	2.0	2.7	0.6	1.1	1.4	1.8

1) The percentages indicate the volume changes in stock building in per cent of volume GDP in the preceding year, both in 1995-prices.

Source: ADAM’s databank and own calculations.

Residential investment is expected to fall by 4 per cent in 2002. The estimated growth rate in 2002 has been revised down by 2 percentage points compared to August. The forecasted negative growth rate in 2002 is primarily due to negative growth in the first two quarters of 2002 and a fall in the business indicators for building and construction. In accordance with a new political agreement a pickup in the number of municipal housing projects is expected, and this will contribute to a modest increase in residential investments of 1 and 2 per cent in 2003 and 2004.

Movements in property prices have showed a significant slowdown since the fourth quarter of 2001. The increase in the real estate price of owner-occupied one family houses are therefore expected to increase by only 2 and 1.5 per cent in 2003 and 2004 respectively, after an increase of 2.5 per cent in 2002.

Business investments are expected to increase in 2002 by 1.5 per cent after a 3 per cent growth in 2001. This is an upward revision of 1.3 percentage points in 2002 since August. The revision in 2002 reflects a surprising high level of investment in equipment in the second quarter of 2002. Influenced by the international environment a slow down in the second half of 2002 is foreseen. In 2003 and 2004 a renewed pick up in production growth is expected to increase growth in business investments by 2.7 per cent and 3.8 per cent, respectively. Business investment growth in 2003 is 0.7 percentage points smaller than expected in August as a consequence of the postponement of an expected upturn in the international market trends. However, low interest rates are expected to support the growth of business investment.

Following an increase in inventory investment of 0.4 per cent of GDP in 2001, inventory changes are expected to be negative, contributing around -0.1 percentage points to GDP growth in 2002. In 2003 and 2004 no contribution from inventory changes to GDP growth is expected.

Figure 1.2a. Total investments in Denmark and EU.

 

Figure 1.2b. External current account in Denmark and EU.

Source: Statistics Denmark, EU-Commission, and own calculations.

Growth in exports of goods and services has not been as strong as expected in the first three quarters of 2002. Hence, export growth in 2002 is revised downward by 1.5 percentage points to 2.8 per cent. Due to the postponed recovery of the international economy the pick up in exports in 2003 will be more moderate than previously expected and export growth is estimated to be 3.8 per cent in 2003, which is a downward revision of 1.7 percentage points compared to the survey in august. In 2004 the renewed international upturn will contribute to a rise in the growth rate of exports to 5.8 per cent.

The gradual increase in domestic demand is expected to lead to a similar rise in imports. Thus, the growth in imports of goods and services are expected to rise from 3.2 per cent in 2002 to 4.3 per cent and 6.8 per cent in 2003 and 2004, respectively.

As a result the surplus on the external current account is expected to remain stable at around 2.0 per cent of GDP from 2002 to 2004, cf. figure 1.2b . Consequently, net foreign liabilities will be reduced from 16.7 per cent of GDP in 2001 to 16.2 per cent of GDP in 2002 and 13.6 per cent and 11.1 per cent of GDP in 2003 and 2004.

In the period from 2001 to 2004 the surplus on the external current account will be of broadly the same magnitude as the surplus on general government finances (cf. below). Consequently, private sector savings are sufficient to finance private investment. Even if the savings ratio of households is small compared to other countries, the total private sector is well in balance.

Employment, unemployment and labour force

Overall employment is expected to fall in 2002 by 6.000 persons, increase in 2003 by 3.000 and 13.000 persons in 2004, cf. table 1.3 . In 2002 and 2003 growth has been revised downwards by 12.000 and 10.000 persons respectively compared to the Survey from August. In 2002 the revisions are based on labour market statistics from the first half of 2002 and the expectation of modest production growth in second half of 2002. In 2003 the revision follows the change in production growth forecast.

Only private sector employment growth has been adjusted compared to the Survey in August. In 2002 private employment is expected to fall by 12.000 persons. This is the first fall in private sector employment on an annual basis since 1994. Next year private sector employment is expected to stay at the same level as in 2002 while it is expected to grow by 9.000 persons from 2003 to 2004 following the international upturn.

From January till October 2002 (seasonal adjusted monthly) unemployment has increased by 10.000 persons, a bit more than expected in the Survey from August. Therefore average unemployment in 2002 has been revised upwards by 2.000 persons compared to the Survey in August to 146.000 persons.

From 2002 to 2003 the average level of unemployment is expected to increase by 9.000 persons. This is a revision of approximately 13.000 persons, which is related both to the revision of growth in 2003 and to the expected higher level of (monthly) unemployment at the end of 2002. In 2004 unemployment is expected to fall by 5.000 persons to an average level around 150.000.

Table 1.3. Key figures of the Danish economy.

	1999	2000	2001	2002	2003	2004
	Percentage changes from previous year
Real GDP	2.3	3.0	1.0	1.5	1.8	2.1
Trade-weighted GDP abroad	3.1	3.6	1.3	1.5	2.5	3.0
Markets for Danish	5.9	12.1	0.6	0.4	6.5	8.4
International competitiveness	-0.5	3.1	-2.1	-1.8	-1.9	-0.5
Export of manufactures, volume	7.5	12.8	2.6	4.5	5.2	7.4
Hourly wages	4.8	3.6	4.2	4.1	3.9	3.7
Consumer price index	2.5	2.9	2.4	2.4	2.0	1.8
Real estate prices for one-family houses	6.9	6.5	5.8	2.5	2.0	1.5
Merchandise export prices	0.9	6.9	2.5	-1.1	0.6	1.0
Merchandise import prices	-1.4	7.4	1.2	-0.6	0.6	0.7
Merchandise terms of trade	2.3	-0.5	1.3	-0.5	0.0	0.4
Productivity in private non-agricultural sector .....	2.3	3.7	1.1	2.2	2.3	2.1
Real disposable income of households 1)	-0.7	2.4	2.3	1.7	2.1	2.8
Labour market:
Labour force (thousands)	2.843	2.856	2.865	2.859	2.871	2.879
Employment (thousands)	2.685	2.705	2.720	2.713	2.716	2.729
Of which in private sector	1.863	1.882	1.892	1.880	1.880	1.889
in public sector	821	823	828	834	837	841
Percentage change in total employment	1.3	0.8	0.5	-0.2	0.1	0.5
Unemployment (thousands)	158	150	145	146	155	150
Early retirements (thousands)	149	156	159	170	176	180
Persons on leave (thousands)	32	26	22	16	4	3
Unemployment rate (per cent)	5.6	5.3	5.1	5.1	5.4	5.2
Unemployment rate, EU-def. (per cent)	5.2	4.4	4.3	4.2	4.6	4.4
Long term bond yields, exchange rate:
10-year government bonds	4.9	5.6	5.1	5.1	4.9	5.3
30-year mortgage credit bond	6.8	7.4	7.1	6.4	6.2	6.6
The effective krone rate (1980=100)	99.6	95.6	96.8	97.6	98.6	98.6
Balance of payments:
Goods and services (bill. Dkr.)	57.3	76.0	86.2	76.4	79.1	81.0
Current account (bill. Dkr.)	20.2	20.6	34.2	28.0	29.0	30.0
Current account in per cent of GDP	1.7	1.6	2.5	2.0	2.0	2.0
Net foreign debt, ult. (bill. Dkr.)	163.0	177.0	224.0	225.0	196.0	166.0
Net foreign debt in per cent of GDP	13.4	13.7	16.7	16.2	13.6	11.1
Public finances:
Government net lending (bill. Dkr.) 2)	38.8	31.7	36.6	21.4	24.6	33.5
Government net lending in per cent of GDP 2)	3.2	2.4	2.7	1.5	1.7	2.2
General government gross debt, ult. (bill. Dkr.)	639.7	606.3	601.4	614.0	606.0	585.8
General government gross debt ult. in per cent of GDP	52.7	46.8	44.7	44.3	42.0	39.0
Tax burden (per cent of GDP) 2)	51.2	48.9	49.1	48.0	47.8	48.2
Expenditures (per cent of GDP)	55.1	53.2	53.4	53.3	52.7	52.4

1) Adjusted for special factors concerning pension funds.

2) For the years 1999-2001 government net lending and the tax burden include the net savings respectively gross savings in the Special Pension fund (app. ½ per cent of GDP).

Source: Statistics Denmark and own calculations.

This implies that the unemployment rate will be 4.3 per cent (standardised figures) in 2002, 4.6 per cent in 2003 and 4.4 per cent in 2004, cf. figure 1.3a . [2]

Though unemployment is expected to increase from 2002 to 2003 the level is still low in a historical perspective. The actual unemployment rate is still below the estimated structural unemployment rate indicating some pressure on capacity in the labour market. However, compared to the Survey in August this pressure has diminished somewhat in 2003.

Figure 1.3a. Unemployment rates in Denmark and EU.

Figure 1.3b. Consumer price inflation (HICP) in Denmark and EU.

 

Source: Statistics Denmark, EU-Commission, and own calculations.

The labour force is expected to fall from 2001 to 2002 by 6.000 persons. This is a downward revision of 10.000 persons compared to the Economic Survey in August. According to a decomposition the fall is primarily due to a cyclical weakening of the labour market and not due to a higher than estimated outflow to early retirement schemes. Overall the labour force is expected to grow by 23.000 persons from 2000 to 2004, cf. box 1.2 .

Inflation and wages

Consumer price inflation is estimated at 2.4 per cent in 2002, 2.0 per cent in 2003 and 1,8 per cent in 2004, cf. figure 1.3b . The estimate for 2002 has been revised upwards by 0.1 percentage point primarily due to higher than expected prices on services and energy. In 2003 the estimate has been revised upwards by 0.2 percentage points. This follows from a slower decline in the inflation rate of services than earlier expected, thus postponing the expected downturn in inflation.

The fall in consumer price inflation from 2002 to 2004 originates from a fall in the contribution from the underlying inflation – a national measure of market determined domestic inflation. Among other things this measure is influenced by lower growth of unit labour costs due to (the estimated) somewhat higher productivity growth and lower wage inflation. The fall in excise taxes on soft drinks, cigarettes and alcohol reduces the inflation rate in 2004 by 0,1 percentage point.

Box 1.2. Labour force growth, 2001-2004

In 2003 and 2004 the labour force is expected to grow by 12.000 and 8.000 persons respectively. Along with the increase of 3.000 persons from 2000 to 2002 this implies that the labour force is expected to grow by 23.000 persons from 2000 to 2004. This is in line with the estimates of the possible development from the government policy strategy ranging to 2010. Though in the years to come there is an underlying downward pressure on the labour force due to the demographic development (that is, for instance, a relative increase of older people having relatively low participation rates) it is expected that participation rates will increase. Increasing labour force participation is expected to follow from previous falls in the intake of people leaving the labour force due to early retirement schemes. Also there is an expected effect from the reforms of these schemes and the recent action plan “More people in employment”. Table a. Contribution to changes in the labour force, 2000-2004   Demographic development Increased participation Total change   1,000 persons Labour force -20 43 23 Transfer income recipients and others outside the labour force -53 43 -10 - Transitional schemes -3 21 18 - Early retirement schemes -19 -5 -24 - Disability retirement schemes -16 28 12 - Other -12 -4 -16 15-66 year-old 33 - 33 Note: The basic scenario (Demographic development) is calculated by keeping the share of the population (according to age, gender, and origin) in the different labour market categories unchanged at the 2000 level. Source: Own calculations and Economic Survey, January 2002.

Hourly wages in the private sector are expected to grow by 4.1 per cent in 2002 and 3.9 per cent in 2003. Compared to the estimates in august the estimate for 2003 has been revised a little downward. This is primarily due to the expected rise in unemployment in 2003. Hourly wages are expected to grow by 3.7 per cent in 2004.

Despite the expected gradual decline in the growth of wages the hourly compensation of employees in Denmark remains higher than the average of the other EU-countries.

Table 1.4. A comparison between the present and the previous forecast.

	2002		2003		2004
	August	December	August	December	December
	Percentage changes from previous year
Private consumption	2.3	2.4	2.3	2.2	2.4
Total government demand	1.4	1.3	0.8	0.6	1.1
of which government consumption	1.3	1.3	0.7	0.7	1.1
of which government investment	2.0	2.0	2.0	0.0	2.0
Residential construction	-2.0	-4.0	1.5	1.0	2.0
Fixed business investment	0.2	1.5	3.4	2.7	3.8
Domestic demand exc. stock building	1.5	1.4	2.1	1.8	2.4
Changes in stock building 1)	-0.2	-0.1	0.0	0.0	0.0
Total domestic demand	1.2	1.6	2.2	1.9	2.3
Exports of goods and services	4.3	2.8	5.1	3.8	5.8
Of which manufactures	4.3	3.5	6.0	4.5	5.5
Total demand	2.2	2.0	3.0	2.5	3.5
Imports of goods and services	3.9	3.2	5.1	4.3	6.8
Of which goods 2)	4.2	5.0	5.5	4.9	6.8
Gross domestic product	1.5	1.5	2.2	1.8	2.1
GDP at factor costs	1.3	1.2	2.4	1.9	2.1
Of which in non-agricultural sector	1.2	1.4	2.8	2.2	2.5
	Changes in thousand persons
Labour force	4.2	-5.9	10.8	12.3	7.8
Employment	5.7	-6.3	12.8	2.8	12.8
of which in the private sector	-0.3	-12.3	9.8	-0.2	8.8
of which in the public sector	6.0	6.0	3.0	3.0	4.0
Unemployment	-1.5	0.4	-2.0	9.5	-5.0

1) The volumes indicate volume changes in stock building in per cent of volume GDP in the preceding year.

2) Excluding production of oil and gas and maritime. (Continues)

Table 1.4. A comparison between the present and the previous forecast (continued).

	2002			2003				2004
	August	December		August		December		December
	Percentage changes from previous year
Merchandise export prices	-0.8		-1.1		1.2		0.6		1.0
Merchandise import prices	0.1		-0.6		0.7		0.6		0.7
Merchandise terms of trade	-0.8		-0.5		0.5		0.0		0.4
Real estate prices for one-family houses	2.5		2.5		2.5		2.0		1.5
Consumer price index	2.3		2.4		1.8		2.0		1.8
Hourly earnings	4.2		4.1		4.1		3.9		3.7
Real disposable income, private sector	1.9		2.9		2.7		2.2		1.7
Productivity in non-agricultural sector	1.4		2.2		2.3		2.3		2.1
	Per cent
Savings ratio in the private sector	28.8		29.4		29.1		29.3		28.8
10-year government bond	5.3		5.1		5.5		4.9		5.3
30-yeat government bond	6.5		6.4		6.6		6.2		6.6
Current account	31.5	28,0		35.0		29,0		30,0
Government net lending	29.8	21,4		32.1		24,6		33,5
Unemployment (thousands)	144	146		142		155		150
	Per cent
GDP growth in OECD countries	1.5	1,5		2,9		2,5		3,0
International market growth	1,4	0,4		7,8		6,5		8,4
Dollar exchange rate (Dkr. Per US$)	7,9	7,9		7,6		7,6		7,6
Price of oil (Us-dollar per barrel)	24	25		25		26		25
Price of oil (Dkr. per barrel)	189,6	197,5		190,3		197,9		190,3

Source: Statistics Denmark and own calculations.

2. The fiscal stance and government finances.

The general government surplus is estimated at 1.5 per cent of GDP in 2002, 1.7 per cent of GDP in 2003 and 2.2 per cent of GDP in 2004, cf. figure 2.1a .

This is a downward revision of 0.6 and 0.5 percentage points in 2002 and 2003, respectively, compared with the Survey in August, whereas estimates for 2004 is included for the first time in this Survey. Part of the revision for 2002 and 2003 follows from a technical revision by Statistics Denmark of the national accounts for 1999 to 2001 [3] , cf. box 2.1 . The remaining downward revision of the government surplus is almost entirely due to a downward revision of the employment and higher unemployment.

Box 2.1. Revisions of the government surplus.

 

The technical revisions (according to new national account definitions) of the government surplus in 2002 and 2003 concerns swap-arrangements where the public sector net expenditures are to be calculated excluding net interest settlements due to swap-arrange­ments. Further, the revision implies that imposed taxes which in fact is never paid by the private households and firms is to be written off. This is now treated as a capital transfer to the private sector. The technical revisions increase the central and local government expenditure burden and reduce the measured general government surplus by approximately 0.25 per cent of GDP from 1999 onwards. The deterioration of the public finances is completely (and also technically) offset by a lower future net interest burden of the public sector net debt. Thereby, the technical revisions do not impact the sustainability of the public finances.

Gross public debt is expected to decline to 39.0 per cent of GDP by the end of 2004 compared to 44.7 per cent by the end of 2001, cf. figure 2.1b .

Figure 2.1a. General government surplus in Denmark and EU.

 

 

Figure 2.1b. Gross public debt ratio in Denmark and EU.

 

Source: Statistics Denmark, EU-Commission, and own calculations.

Fiscal policy in 2003 is based on the budgets of the local governments and the central government budget agreement for 2003.

The fiscal effect, which measures the first year impact of discretionary fiscal policy changes on GDP, is estimated at 0.2 per cent in 2002 and 0.1 per cent in 2003, cf. table 2.1. The fiscal policy for 2004 is based on technical assumptions in line with the target in the Government 2010-plan. The actual fiscal policy for 2004 is to be determined in 2003.

GDP-growth is also influenced by fiscal policy measures in previous years including continued structural effects from the saving incentives due to the adjustment of income taxation adopted in June 1998 ( Whitsun package ). The cumulated activity effect and structural saving effects are expected to dampen activity by 0.1 per cent in 2002 and 2003. Thus, the effect on economic activity of overall economic policy is slightly negative for 2002 and neutral for 2003, cf. annex A1 .

Table 2.1. Activity effect of fiscal policy and structural saving effects

 

	1998	1999	2000	2001	2002	2003
	Per cent
Fiscal effect	0.1	0.2	-0.1	0.1	0.2	0.1
	Percentage points
Cumulated activity ef-fect of fiscal policy	-0.7	-0.5	-0.6	-0.3	-0.1	-0.1
Structural saving effects	-0.4	-0.6	-0.5	-0.4	-0.2	0.1

Source: Statistics Denmark and own calculations.

This level of fiscal tightness is considered appropriate in view of the current cyclical position of the Danish economy, also taking into account that fiscal policy must be conducted given the monetary policy implied by the fixed exchange rate in the ERM II. The fixed exchange rate implies that monetary policy is effectively determined by the ECB.

Thus, the fiscal stance should be considered in the context of sharp interest rate cuts internationally during 2001 and the renewed decline of interest rates during the summer and autumn of 2002, a low level of unemployment, and a relatively high level of capacity utilization. Hence, the estimated level of the output gap is still positive, cf. figure 2.2a, and annual wage increases are expected to be approximately 1 percentage point higher than abroad, cf. figure 2.2b.

Figure 2.2a. Output gap.

Figure 2.2b. Wage increases.

Source: Statistics Denmark, EU-Commission, and own calculations.

General government finances in a long term perspective

It is the Government's objective to reduce public debt and thereby ensuring the long-term sustainability of government finances in the prospects of future demographic changes.

Therefore, the size of the current budget surplus must be compared to the future obligations of the public sector, including expenditures for pensions and care for the elderly.

The required surplus on the budget balance adjusted for these future obligations is calculated on the basis of the latest demographic projection. It is estimated that a surplus in the range 1½ to 2½ per cent of GDP on average until 2010 will ensure that fiscal policy is on a sustainable path.

The estimated structural surplus is around 2 per cent in both 2002 and 2003, which is in line with the medium term target, cf. annex A1 .

 

Annex

A1. Fiscal policy  Fiscal stance

Since 1997 the fiscal stance measured by the cumulated fiscal policy contribution to GDP-growth has been negative,  cf. table A1.1 and Box A1.1. In 2002 and 2003 the effects of tight fiscal policy in previous year  is expected to ease and the fiscal stance will become more neutral.

Table A1.1 Contributions to GDP-growth.

	1997	1998	1999	2000	2001	2002	2003	2004
	Per cent
GDP-growth	3.0	2.5	2.3	3.0	1.0	1.5	1.8	2.1
Fiscal effect	-0.5	0.1	0.2	-0.1	0.1	0.2	0.1	-
Cumulated effects, hereby:	Percentage points
Economic policy	-0.7	-1.1	-1.1	-1.1	-0.7	-0.3	0.0	-
- Cumulated fiscal policy	-0.7	-0.7	-0.5	-0.6	-0.3	-0.1	0.0	-
- Structural saving effects	0.0	-0.4	-0.6	-0.5	-0.4	-0.2	0.1	-
Changing interest rates	0.8	0.9	1.0	0.8	-0.1	0.3	0.3	-
Other factors	2.9	2.7	2.4	3.3	1.7	1.5	1.5	-

Note: The cumulated effects of fiscal policy embrace the impact on growth from policy changes in present and previous years.

Source: Statistics Denmark and own calculations.

Box A1.1. Contributions to GDP-growth from cumulated effects of fiscal policy and changes of the interest rate, 1997-2003.

In 1997-2000 GDP-growth was decreased by the cumulated effects of fiscal policy tightening including the structural effects of lower tax value of households interest expenditures.

In 2001 both higher interest rates and fiscal policy tightening has contributed to dampen the growth of GDP

For year 2002 a modest tightening of the fiscal policy is expected to dampen growth while lower interest rates are supposed to increase the growth of GDP in both 2002 and 2003.

Figure a. Contributions to GDP-growth from cumulated effects of changes in the interest rates and fiscal policy, percentage points.

Source: Own calculations.

Fiscal sustainability

The structural surplus is estimated at 1.7 per cent of GDP in 2002 and 1.9 per cent of GDP in 3003 and 2004,  cf. table A1.2 . This is, considering the uncertainty, at the estimated requirement for long-term sustain­abi­lity, and in the middle of the medium term target range of 1½ and 2½ per cent. Thus fiscal policy is assessed to be on a sustainable path.

Table A1.2. Sustainability of the public finances per cent of GDP.

	2003	2004
Stance of public finances:
General Government surplus	1.7	2.2
- hereby social funds	0.9	0.7
- hereby central and local government	0.8	1.5
Central and local Governments net interest expenditures	2.0	1.8
Central and local government primary surplus	2.7	3.4
Deviations between actual and structural primary surplus	-0.6	0.3
1.  Central and local government structural primary surplus	3.3	3.1
Requirement for central and local government primary surplus:
Public consumption, tax freeze 1 and lower taxes on labour Income  1)	3.0	3.0
Increase in net taxes from private pension funds	-1.4	-1.5
Taxes from North Sea oil and gas productionIndtægter fra indvinding i Nordsøen	0.6	0.6
Burden of net expenditures on public net debt	1.0	0.9
2. Requirement of central and local government structural primary surplus	3.2	3.0
3. Sustainability indicator	0.1	0.1

1) After 2010 a technically assumption of increases in underlying tax revenues in line with GDP-growth is applied.

Source: Own calculations.

A2. The accuracy of short term forecast

The following section examines the (ex post) accuracy of the short-term economic projections made by the Danish government between 1980 and 2001.

Forecasts of GDP-growth track the actual growth rate fairly well,  cf. figure A2.1a. However, in some years there are large deviations between the forecast and the actual value – especially for the year ahead forecasts.

Figure A2.1a. GDP-forecasts, annual growth rate.

Figure A2.1b. Inflation forecasts.

Source: Economic Survey (1979-2001) and Statistics Denmark.

For GDP-growth the forecast error is on average close to zero indicating no systematic bias in the forecast,  cf. table A2.1 .

The average absolute forecast error and the root mean square error (RMSE), which are measures of forecasts precision, are 0.9 and 1.1 percentage point respectively for the year ahead forecast of GDP. The magnitude of forecast precision rises to about 0,5 percentage points, as the forecast horizon gets shorter. The mean absolute errors of the forecast for the following year are 50-70 per cent of the normal fluctuation in the GDP growth rate.

Forecasts of inflation have an average absolute error of about 0,6 and 0,3 percentage points for the year ahead and the current year forecasts, respectively. This low degree of uncertainty is partly due to the relatively low volatility in the inflation rate.

The average absolute error of unemployment forecast is about 0,5 percentage points for the year ahead forecast, which is about ½ of the actual volatility in the unemployment rate.

Table A2.1. Government economic projections, 1980-2001.

		Forecast horizon
		2 years ahead	Year ahead			Current year
	Volatility	Autumn		Spring	Autumn	Spring	Autumn
Number of observations		9		14	22	19	22
	Percentage points
GDP-growth:
Mean forecast error	-	-0,03		-0,23	-0,10	-0,01	0,08
RMSE	-	1,16		0,85	1,11	0,74	0,59
Average absolute error	1,25	1,01		0,64	0,88	0,62	0,52
- compared to volatility		0,81		0,52	0,70	0,49	0,41
Inflation:
Mean forecast error	-	-0,26		-0,07	0,13	0,20	-0,02
RMSE	-	0,63		0,68	0,92	0,85	0,55
Average absolute error	0,81	0,51		0,53	0,74	0,45	0,24
- compared to volatility	-	0,63		0,65	0,92	0,56	0,29
Unemployment rate:
Mean forecast error	-	-0,17		-0,12	-0,02	-0,06	-0,04
RMSE	-	1,20		0,95	0,74	0,41	0,15
Average absolute error	1,14	1,06		0,81	0,54	0,31	0,12
- compared to volatility	-	0,93		0,71	0,48	0,27	0,10

Note: The forecast error is the difference between the first available realization of the variable (first settled estimate) and the forecast. Volatility is calculated as the average absolute deviation from the mean.

Source: Economic Survey, 1979-2001.

The current year forecast of GDP, inflation and unemployment are all superior to the naïve alternatives,  cf. box A2.1 . This is also the case for the year ahead, although the differences are smaller.

Box A2.1. Comparison to naïve forecasts.

Forecast evaluation traditionally looks to some alternative forecasting procedures to provide a benchmark against which to compare the forecasts under examination. In this case two naïve alternative forecasts are considered: ·         The forecast is equal to the historical mean of the preceding 10 years. ·         The forecast is equal to the last available realization of the variable. Forecasts are compared using the Theil-statistic, which is computed as the ratio of the RMSE of the forecast in question to the RMSE of the naïve alternative. Theil-statistics less than 1 are said to beat the naïve forecast. Forecasts made within the year are for all the variables superior to the alternative forecasts. The relative accuracy of the forecast deteriorates for the year ahead forecast, but continues to outperform the naïve forecasts. The Theil-statistic for the year ahead GDP-forecast is 2/3 percentage points compare to alternative 1. This also indicates that the GDP-forecast captures about 1/3 of the overall variation in the GDP-growth rate. Table a. Comparison to naïve forecasts.   Forecast horizon   Current year Year ahead   Alternative 1 Alternative 2 Alternative 1 Alternative 2   Percentage points GDP-growth 0,36 0,28 0,67 0,44 Inflation 0,19 0,40 0,33 0,49 Unemployment rate 0,05 0,14 0,25 0,39 Source: Economic Survey, 1979-2001.

Comparison forecast accuracy with EU-commission and OECD

Compared with the forecasts made for Denmark by the EU-Commission and OECD there are only small differences in the forecast accuracy.

Apart from the OECD-forecast the average absolute error of the GDP-forecast is below 1 percentage point,  cf. table A2.2 . The growth forecasts of the EU-Commission overshoots the actual GDP-growth rate by around 0,2 percentage points.

Table A2.2. Forecast comparison (year ahead autumn forecast).

	Economic Survey	EU	OECD
	Percentage points
GDP-growth:
Mean forecast error	-0,10	-0,22	-0,01
RMSE	1,11	1,14	1,32
Average absolute error	0,88	0,86	1,06
Inflation:
Mean forecast error	0,13	0,37	0,13
RMSE	0,94	0,87	1,08
Average absolute error......	0,76	0,63	0,80
Unemployment rate:
Mean forecast error	-0,02	-0,15	-0,26
RMSE	0,74	1,05	0,81
Average absolute error	0,54	0,75	0,67

Source: Economic Survey, EU-commission forecast and OECD Economic Outlook.

EU-forecasts of the inflation rate have the lowest absolute error, but the forecasts have a tendency to undershoot the actual inflation rate of about 0,4 percentage points. Forecast from both OECD and Economic Survey have a mean forecast error close to zero and an absolute average error around 0,8 percentage points.

The accuracy of the unemployment forecasts in the Economic Survey is high compared to the forecast of EU and OECD. Furthermore, the forecasts of EU and OECD both have a slight tendency to overshoot the actual unemployment rate.