The V-shaped recovery is an optical illusion, says Danish central bank head

Per Callesen, governor of Denmark's Nationalbank, reflects on the state of the Danish economy in the wake of Covid-19 and the unique challenges the pandemic has created for economic policy makers.

After the Covid-19 pandemic plunged the Danish and global economy into a historically deep recession in the spring, there has been much discussion of a so-called “V-shaped” recovery, reflecting a solid bounce back of economic indicators.

Per Callesen, Governor, Denmark's Nationalbanken

Per Callesen, Governor, Denmark’s Nationalbank

If you look at the growth numbers, it may appear to be a “V,” but that’s an optical illusion, according to Per Callesen, the governor of Denmark’s central bank. If it’s a V, it’s a V that’s truncated on the right hand side, he told an online audience of institutional investors at a recent Nordea Markets event.

Comparing current growth forecasts to those done before the pandemic reveals a significant loss that’s longer-lasting than one may expect, Callesen explained.

“Global GDP will stay below pre-pandemic forecast levels for some time,” he said.

Callesen was welcomed by Nordea Group Chief Economist Helge Pedersen, who hosted the event on the current state of the Danish economy and the challenges for Danish monetary policy during the coronavirus crisis.

“You couldn’t get a more qualified speaker than Per,” Pedersen said when introducing the governor, who has held the top post at the Danish central bank since 2011.

Global GDP will stay below pre-pandemic forecast levels for some time.

Per Callesen, Governor, Denmark's Nationalbanken

A substitution effect in consumer spending

While the lockdowns to slow the spread of the virus have had enormous financial costs, Callesen presented a relatively sanguine picture of the Danish economy.

Danish exports have fared well compared to most countries, supported by a robust composition of goods from the pharmaceutical, agriculture and food sectors. Still, exports of services have plummeted over the course of 2020, with tourism suffering the biggest hit.

He noted that Danish card transaction data has been buoyant over the last months, a good indicator of strong private consumption. While Danes’ spending abroad has nose-dived, this spending seems to have moved towards domestic goods, including almost everything housing-related, such as new kitchens and DIY products, as well as retail and online sales.

“There is a lot of substitution going on,” said Callesen.

Disposable income has also remained buoyant, helped by government aid packages and the release of frozen holiday funds.

While some have been surprised by the strength of the Danish housing market in 2020, Callesen said he is personally not surprised. He describes it as another “substitution effect” of people transferring the money they would spend on travel, entertainment and hospitality to their domestic homes, where they are cooped up for a substantial period of time.

Colorful buildings in Nyhavn, Copenhagen

A welfare loss of DKK 250 billion

The Danish central bank expects GDP to drop by 3.6% in 2020, increase by 3.6% in 2021 and by 2.3% in 2022.

“It looks like a V, but a truncated V,” Callesen said, noting that the total welfare loss coming out of the crisis is estimated to be a cumulative drop in GDP of DKK 250 billion, or 10% of annual GDP.

When it comes to monetary policy in the face of the crisis, Callesen said the actions taken by central banks, such as interest rate cuts, liquidity provisions, asset purchases and the release of the countercyclical capital buffer, have been crucial for underpinning overall economic activity.

He described numerous global factors, including ageing populations, high savings rates and globalisation, which are all contributing to a low inflationary environment and low interest rates – something not likely to change anytime soon.

Regarding fiscal policy, Callesen noted that the coronavirus crisis has hit unevenly, with some sectors enjoying record-high turnovers while others have been brought to their knees. One way to visualise it is as a K-shaped recovery, with sectors such as retail, IT and housing on the upward slope and hotels, restaurants and exports on the downward slope.

“That’s a challenge for fiscal policy,” Callesen said, as you run the risk of overstimulating the high-performing sectors and introducing bottlenecks.

“There could be scope for more stimulus down the line when a lot of these restrictions are fading, but we’ll probably save the ammunition a bit longer,” he said.

The situation seems to be well under control in Denmark – even if the compensation schemes are so generous that disposable income has actually risen during the crisis.

Helge J. Pedersen, Nordea Group Chief Economist

Phasing out government aid

Nordea Group Chief Economist Helge J. Pedersen

Nordea Group Chief Economist Helge J. Pedersen

With regard to state aid and compensation measures during the pandemic, Callesen noted that economists have been united in their view that these measures should be phased out to avoid tampering with the dynamics of the economy and the relocation that needs to take place. He said he was overall satisfied with the Danish government’s approach, which he described as productive and not overly expansive.

Reflecting on the event, Nordea’s Pedersen welcomed the opportunity to hear Callesen’s view on the Danish economic situation during the pandemic, particularly the discussion of the different policy issues.

“The lockdown costs are huge and could raise questions about the debt sustainability in numerous countries in the longer run,” Pedersen said. “However, the situation seems to be well under control in Denmark – even if the compensation schemes are so generous that disposable income has actually risen during the crisis.”

Read more about Nordea’s forecasts for the Danish economy in the latest Nordea Economic Outlook.

And follow the latest research from Nordea’s macroeconomists on the Danish economy.


Front page photo of Denmark’s Nationalbank by Chris Ratcliffe/Bloomberg via Getty Images

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