The Danish economy has emerged relatively unscathed from the coronavirus crisis, and the scene is thus set for a strong recovery once it is over. There is still huge pent-up spending demand among households, and Danish exporters are well positioned to take advantage of rising global growth. Also Danish public finances are better than expected, so, despite unprecedented fiscal stimulus, Denmark’s public sector deficit for 2020 is the lowest among the EU countries.
In 2020 the Danish economy contracted by 2.7%, the biggest decline recorded since 2009. The number masks a sharp drop in Q2 2020 and positive growth rates in both Q3 and Q4.
Towards the end of 2020, new tight restrictions were implemented to contain a sharp increase in infections. But since 1 March this year these restrictions have been gradually eased, and recently the reopening has accelerated further. As one of very few countries in the world, Denmark has chosen not to use the vaccines from AstraZeneca and Johnson & Johnson. Even so, all adults over 50 years of age are expected to have been offered vaccination by early-July, while the entire population over 15 years will likely have been offered vaccination in August. If the current vaccination plan holds, the Danish economy will probably be free of most restrictions by end-Q2 this year.
Despite the restrictions in the early months of 2021, preliminary indicators point to only a modest decline in activity. This, coupled with a major boost from the fast reopening, has strengthened confidence in a strong economic recovery in 2021. Hence, we have revised up our forecast for GDP growth this year from 2.5% to 3.0%. This means that the activity level will likely as early as in the autumn be higher than the previous record high from end-2019. The solid economic recovery is expected to continue into 2022, although higher interest rates, a less accommodative fiscal policy and a housing market slowdown will likely put a lid on growth rates.
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Huge spending potential among households
Household consumption has been a key factor behind the relatively strong performance of the Danish economy during the coronavirus crisis. Despite the many restrictions in 2020, total household consumption only declined by 1.9%; during the financial crisis the drop was almost twice as big.
The strong resilience of household consumption is attributable to a benign housing market trend as well as the payout of frozen holiday pay, which, combined with declining interest expenses and continued positive real wage growth, has lifted household disposable incomes markedly. The growing incomes have also resulted in an increase in household savings, despite the sharp pick-up in their consumption of goods. If households start to save less again and spend more on especially services in tandem with the reopening, it could boost overall economic activity significantly over the summer.
Denmark: Macroeconomic Indicators, Baseline scenario
|Real GDP, % y/y||2.2||2.8||-2.7||3.0||2.8|
|Consumer prices, % y/y||0.8||0.8||0.4||1.1||1.4|
|Unemployment rate, %||3.8||3.7||4.7||4.2||3.6|
|Current account balance, % of GDP||7.0||8.8||7.8||6.7||6.9|
|General gov. budget balance, % of GDP||0.7||3.8||-1.1||0.0||0.4|
|General gov. gross debt, % of GDP||34.0||33.3||42.2||40.0||39.0|
|Monetary policy rate, deposit (end of period)||-0.65||-0.75||-0.60||-0.50||-0.50|
|USD/DKK (end of period)||6.53||6.66||6.08||6.42||6.48|
Buoyant housing market activity
During the crisis, the performance of the Danish housing market was far better than expected. Since spring 2020 activity has been high, with more homes sold and a steady increase in selling prices. This surprising trend has mainly been driven by the cheap financing available and the continued rise in disposable incomes. Also, as many people have been working from home during the lockdowns, they may have reconsidered their housing priorities, and this has boosted demand.
Preliminary data suggests that housing market activity gained further momentum in early 2021. As a result, in March the Systemic Risk Council expressed concern about developments, especially in the areas around Copenhagen. Against this backdrop, it expects to recommend new measures to curb the mounting housing market risks in June. Ultimately, it will be up to the government to decide whether it wants to follow the council’s recommendations.
We expect the average price of single-family houses to rise by around 12% this year. In that case, it will be the highest annual price increase since 2006. However, it should be emphasised that the current selling prices already reflect a large part of this increase. The reason is that the forecast is based on the average selling prices for the whole year, and as prices mainly rose in late 2020 and early 2021, this factor alone will significantly jack up the annual rate of increase for 2021 as a whole.
Our forecast assumes that a better supply and demand balance will be established in the housing market during H2 2021 as more homes are put on the market and demand starts to weaken. Combined with upward pressure on financing costs, this should cause the surge in the average price per square meter of houses to level off. The flattening trend is expected to continue into 2022 when prices are expected to rise by “only” 2.5%.
Strong labour market may pose challenges
During the coronavirus crisis the number of wage-earners has declined sharply. When the crisis peaked in late spring last year, there were 75,000 fewer wage-earners than before the crisis. And even though many people did find jobs during the autumn, the number of jobs lost in the Danish labour market remains over 30,000 today. That number would probably have been even higher if parliament and the labour market organisations hadn’t introduced measures throughout the crisis that kept a large number of people in jobs that might otherwise have been lost due to the lockdowns.
Recent indicators suggest that a sharp labour market turnaround is in the making as a result of the gradual reopening of the economy. The number of new job vacancies has increased significantly, and labour shortages are developing. This is especially evident in the construction sector where more than one-fourth of employers say they find it difficult to fill vacancies. This is the highest level recorded in over two years. Labour shortages are also now emerging in the industrial sector and the services sector.
The prospect of rising employment is of course good news for the Danish economy and Danish households. But if many companies end up struggling with a shortage of labour, it could potentially weaken Denmark’s competitiveness and, in turn, the strength of the expected economic recovery.
The Danish economy has emerged relatively unscathed from the crisis, which provides a strong starting point for future growth.
Jan Størup Nielsen, Nordea Chief Analyst
The turnaround in the labour market also paves the way for a higher rate of increase in nominal wages. However, any pick-up in nominal wages will coincide with a slightly faster increase in consumer prices than seen so far. We expect inflation this year to be 1.1% –the highest level since 2017 and somewhat higher than the average consumer price increase of 0.4% in 2020. The higher rate of inflation is mainly due to higher excise duties on cigarettes, slightly higher rents and rising petrol prices.
The uptrend in inflation is expected to continue in 2022 when especially services prices are likely to rise a bit faster than previously. At the same time, inflation in Denmark is projected to rise slightly faster than in the Euro area in 2022, as the Danish economy overall has fared better during the pandemic than many other countries in the Euro area and because rising rents weigh more in the Danish consumer price index.
Last year Danish exports plummeted by more than 7.5%. This means that the decline in exports matches that recorded during the financial crisis in 2009. However, it should be emphasised that a major part of this decline is due to a sharp drop in exports of services, including spending by foreign tourists in Denmark. But Danish goods exports have also declined during the coronavirus crisis. Especially exports to other European countries have weakened, while large exports of pharmaceutical products have contributed to maintaining a high level of goods exports to the US.
With the prospect of a global economic recovery and growing demand in Europe, the outlook for Danish exporters looks bright. They benefit from improved competitiveness as a result of better productivity trends and terms of trade (reflecting the development of Danish export prices relative to import prices). Moreover, Danish exports are expected to benefit strongly from the green transition as many countries will invest massively in areas where Danish companies have strong competitive positions.
Narrower interest rate corridor
In March, the Danish central bank announced a major change to the monetary policy system in Denmark. As a result of this change, the certificate of deposit rate was raised by 0.1% point, while the current account rate was lowered by 0.5% point, and the lending rate was reduced from +0.05% to -0.35%. As a result of the adjustments, the Danish central bank now only has one deposit rate, which is on a par with that of the ECB.
During the first months of the year, the Danish krone strengthened further against the euro. The DKK appreciation prompted the Danish central bank to sell Danish kroner to defend its fixed exchange rate regime in February for the first time since 2017. Initially, we do not expect the central bank’s intervention to herald an independent Danish rate cut. Our baseline scenario is that the central bank will keep its policy rates unchanged until end-2022. But Danish market rates on longer maturities are expected to rise gradually in tandem with the recovery of the Euro-area economy. During this period, Denmark’s healthy public finances and large current account surplus will likely continue to underpin a small interest rate differential between Denmark and the Euro area.
This article first appeared in the Nordea Economic Outlook: Unrestricted Growth, published on 11 May 2021.
Jan Størup Nielsen, Nordea Chief Analyst
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