1ST QUARTER 2016 NO. 1 NEWS FROM NATIONALBANKEN PROSPERITY IN DENMARK IS KEEPING UP Since the crisis in 2008, the Danish economy has generated an increase in prosperity, which is actually slightly higher than in Sweden and on par with the USA. This is the conclusion in a new analysis by Danmarks Nationalbank of how prosperity has developed in a number of countries since the financial crisis. The conclusion defies conventional wisdom regarding the Danish economy over the last few years. This wisdom says that Danish prosperity has had more difficulties recovering in the wake of the financial crisis in 2008 when compared to other countries. The analysis from Danmarks Nationalbank shows that this wisdom does not tell the whole Chart 1 The chart shows the average annual positive or negative rate of growth in GDP and prosperity in the period 2007-14. Development in GDP and prosperity from 2007 to 2014 Chart 1 Average annual growth 2007-14, per cent. 1.5 1.0 0.5 0.0-0.5-1.0 Although real GDP in Denmark is lower than in 2007...... prosperity has increased in line with that of e.g. the USA -1.5 Finland UK Netherlands Sweden Denmark USA Germany GDP Prosperity (terms-of-trade adjusted GNI per 20-64-year-old) Note: Prosperity is here defined as terms-of-trade-adjusted GNI per person in working age population (20-64 years). Both GDP and GNI are stated in real terms. Source: Statistics Denmark, Eurostat, U.S. Census Bureau, Bureau of Economic Analysis, U.S. Department of Commerce.
2 truth. The crux of the analysis is to focus on prosperity and not just the gross domestic product (GDP) for the society as a whole. As a measure of prosperity the terms-of-trade-adjusted gross national income (GNI) per 20-64-year-old is used. The difference between this measure of prosperity and GDP is, in short, that the first reflects the purchasing power of Danish income, whereas the second reflects the production of goods and services in Denmark (less of intermediate consumption in the production). While Denmark s GDP has lagged behind those of other countries since the financial crisis, Danish prosperity has developed far more favourably, cf. Chart 1. The chart shows that prosperity has fallen in countries such as Finland, the UK and the Netherlands since 2007. In contrast, Denmark has seen growth in prosperity on par with the USA and slightly higher than in Sweden. DIFFERENCES ACROSS COUNTRIES The economic development in Denmark negative GDP and positive prosperity since 2007 is the opposite of that seen in the UK. There, GDP has grown at a reasonable rate in line with developments in e.g. Sweden and Germany, while prosperity has declined since 2007. How prosperity develops compared with GDP reflects three main factors: capital income from abroad, development in the terms of trade and population developments. As regards the latter, the populations of countries such as the UK, the USA and Sweden have grown since 2007. This means that there have been more people to generate the growth in prosperity. However, that is not the case for Denmark, where the population has been constant during this period. Thus, the difference between developments in prosperity and GDP is not caused by changes in the population. Rather, the greater prosperity in Denmark despite lower output can be explained by capital income from abroad and better terms of trade. Capital income is the main reason why Danish prosperity is higher today than previously. The money comes from e.g. Danish firms producing and selling goods in the USA (not included in Denmark s GDP) and distributing profits to Danish shareholders (included in GNI). Another source of the rising prosperity is a favourable development in the terms of trade. Unlike several of our neighbouring countries, Denmark has seen a higher rise in export prices than in import prices since 2007. This has boosted the purchasing power of Danish households and firms. For further information see Current Economic and Monetary Trends in the Monetary Review, 1st Quarter 2016. THE USA IS EFFECTIVELY OUR SECOND LARGEST EXPORT MARKET The USA is second after Germany in terms of the countries that ultimately use Danish exports. Sweden moves down to fourth place after Germany, the USA and the UK, not far ahead of China, which is rapidly increasing its share of Danish exports. This is evident from a new analysis by Danmarks Nationalbank published in the Monetary Review, 1st Quarter 2016. The analysis is based on data from the World Input-Output Database (WIOD) that make it possible to track goods and services all the way from the intermediate stage to the country of final use. For example, a hi-fi system produced in Denmark may be purchased by a German car manufacturer whose vehicles are sold in the US market. In this case, direct exports go to Germany, but ultimately exports are dependent on US not
3 Top 5 destinations for the final use of Danish goods and services Chart 2 Per cent 10 9 8 7 6 5 4 3 2 1 0 Germany USA UK Sweden China Countries ultimately using Danish exports Danish direct exports Note: WIOD is based on national sources, but adjustment has been made to ensure consistency between global imports and exports. Therefore the data is not identical to data from e.g. Statistics Denmark. Data from 2011. Source: WIOD and Danmarks Nationalbank. Chart 2 Sweden purchases almost as many Danish direct exports as Germany, but much is used in products that is re-exported from Sweden to other countries. Danish employment linked to exports Table 1 1,000 persons Jobs directly linked to exports to: Jobs linked to final use of exports in: Germany 95 82 USA 54 69 Sweden 73 53 UK 54 53 China 40 47 Note: Data from 2011. Source: WIOD and Danmarks Nationalbank. Table 1 A total of 95,000 jobs are linked to exports to Germany, but of these only 82,000 relate to final use in Germany.
4 German market conditions. Or perhaps Ukrainian pig feed is used for raising Danish pigs, which are slaughtered in Germany and consumed in the UK. The analysis takes a new approach to export destinations and as Chart 2 illustrates shows that the German and US market are, broadly speaking, equally important for Danish exports. While 9.3 per cent of total exports ultimately go to Germany, 8.9 per cent go to the USA. CHINA IS BECOMING STILL MORE IMPORTANT All in all, nearly 800,000 Danish jobs were linked to exports in 2011. That is equivalent to 28 per cent of total employment. The figure covers employees in actual export firms, as well as sub-suppliers such as the accountant, window cleaner or mechanic of the export firm. When it comes to the number of Danish jobs linked to exports it also makes a great difference whether focus is on direct exports or the final destination for the use of Danish exports. A total of 95,000 jobs are linked to exports to Germany, but of these only 82,000 relate to final use in Germany, cf. Table 1. The Swedish market is also less important than usually assumed. While the US market is of importance to 69,000 Danish jobs, Sweden and the UK are neck and neck at 53,000 jobs. They are followed closely by China, which supports 47,000 Danish jobs only slightly fewer than Sweden. At the same time, China is a growing export market of increasing importance to Denmark. In the period 1995-2011, the number of Danish jobs linked to final use of Danish exports in China increased by around 400 per cent. For further information see the article Global Value Chains in the Monetary Review, 1st Quarter 2016. THE PRESSURE ON THE KRONE GAVE DANMARKS NATIONALBANK A PROFIT OF DKK 2 BILLION For Danmarks Nationalbank, and hence for the Danish government, the pressure on the Danish krone in 2015 was profitable. Danmarks Nationalbank made a total profit of just over kr. 2 billion from investors large-scale purchases of Danish kroner and sales of foreign exchange at the beginning of the year. That can be seen from Danmarks Nationalbank s Report and Accounts 2015. Income from the pressure on the krone came from two sources. One was the direct gain on Danmarks Nationalbank s sale and subsequent purchase of Danish kroner. In January and February, Danmarks Nationalbank sold kr. 275 billion. As investor interest in the krone subsided, the kroner were repurchased at a marginally lower exchange rate. That small difference gave Danmarks Nationalbank a profit of kr. 0.8 billion. Danmarks Nationalbank s profit 2015 Kr. billion 4.0 3.0 2.0 1.0 0.0 1.4 Profit excluding pressure on the krone Source: Danmarks Nationalbank. 3.6 Chart 3 Profit including pressure on the krone Chart 3 More than half of Danmarks Nationalbank s profit for 2015 related to the gain from the pressure on the krone.
5 The other source of income related to the fact that Danmarks Nationalbank also lowered its rates of interest in order to defend the krone. The rate of interest on certificates of deposit was reduced to -0.75 per cent, which meant that Danmarks Nationalbank actually earned interest when borrowing money. At the same time, it was possible to invest the foreign exchange reserve at a higher rate of interest, e.g. in the euro area, than the rate paid by Danmarks Nationalbank for borrowing in kroner. That provided excess earnings of almost kr. 1.5 billion. MORE THAN HALF OF THE PROFIT FOR THE YEAR The profit from the pressure on the krone accounted for more than half of the total profit for 2015, which was kr. 3.6 billion. The other sources of income were the investments made by Danmarks Nationalbank. In respect of the latter, especially Danish and foreign bonds and equities contributed to the profit, while losses were made on e.g. gold. For further information see Report and accounts 2015. PUBLISHING, DESIGN AND LAYOUT: DANMARKS NATIONALBANK DANMARKS NATIONALBANK HAVNEGADE 5 DK-1093 COPENHAGEN K WWW.NATIONALBANKEN.DK