DI Den 23. januar 2009 kr The Danish economy has gone into a recession of historic dimensions Danish exports have been seriously affected and the estimated decrease in exports is expected to be stronger than we have seen at any time since World War II. But also consumer spending and investments demonstrate a clear decline. The negative growth is estimated to have been very significant in the fourth quarter of last year and is expected to be equally significant in the first quarter of this year. After that, the decline is expected to slow down and come to a halt. Overall a decrease in GDP by just over 2 per cent is expected in 2009 and 2010 combined. Strong decline in exports Danish exports have been hit by a downturn of historic dimensions with regards to the international demand and have also been affected by a significant weakening of Denmark s competitiveness. Exports fell by 1.1 per cent from the second to the third quarter in 2008 and are estimated to have decreased by almost two per cent in the fourth quarter of 2008. The decrease in exports is expected to continue in the first and second quarters of 2009 with a decline of approximately 1.5 per cent and approximately one per cent respectively. Exports will then be reduced by approximately 5.5 per cent in fixed prices in the course of a four quarter period. Measured in current prices exports are expected to decrease by DKK 110 billion or 12 per cent in comparison with the previous year. Exports and Private Consumption Bn. DKK 0 Bn. DKK 0 900 800 700 Exports Private consumption 900 800 700 600 600 500 00 01 02 03 04 05 06 07 08 09 10 500 Source: Statistics Denmark and Confederation of Danish Industry Sagsnr.:
Competitiveness has weakened Traditionally, Danish exports have been less sensitive to market fluctuations than exports in neighbouring countries. But the Danish competitiveness has been weakened significantly by the depreciation of the Swedish and Norwegian krone and, the British pound. At the same time the increase in Danish wages is substantially higher than in the countries against which we have a fixed exchange rate. As a consequence the Danish export decreases in line with the decline in international demand. During the second quarter of 2009 the plunge in international demand is expected to come to an end. Nevertheless, there is a considerable uncertainty about the development of the international economy where a substantial and rapid increase in unemployment could lead to a more significant reluctance among consumers and investors. But it should be remembered, that the purchase of cars and the number of building permits have already been reduced by almost 50 per cent in the OECD countries, which means that there are limits as to how much it is possible to cut back on investments in construction and in private consumption. The expected downturn in exports and the weak competitiveness means that the activity level decreases significantly for Danish exporters, so it is absolutely necessary for companies to reduce their costs significantly. Therefore, a substantial reduction in employment in the exporting sectors must be anticipated. Supply and Demand in the Danish Economy 2007 2007 2008 2009 2010 Bill. DKK Percentage volume change Private consumption 827 2,4 0,6-1,8 0,4 Public consumption 439 1,3 0,7 1,4 1,0 Gross fixed investments 377 3,8-0,5-4,2-2,0 Residental investments 117 4,8-5,0-6,5-2,0 Business investments excl. ships 220 4,7-0,4-6,4-2,6 Public investments 29-10,0 1,3 2,3 1,3 Change in stocks 10-0,3 0,1-0,1-0,3 Domestic demand 1652 2,3 0,6-1,5-0,3 Export of goods and services 883 2,2 2,9-3,6 0,9 of which goods 545-0,4 1,4-4,5 0,2 Import of goods and services 847 2,8 5,3-3,1 0,7 of which goods 558 2,2 3,5-4,5-0,1 GDP at market prices 1688 1,9-0,6-1,9-0,3 Note: Change in stocks is measured as percentage of GDP in the previous year Source: Statistics Denmark and the Confederation of Danish Industry Decline in private consumption Rapid normalization of the level of consumption Private consumption has declined significantly in the third and the fourth quarter of 2008 and the decline is expected to continue in the first quarter of 2009. Hereafter, a so-called standstill in private consumption is expected, which means 2
that households no longer spend significantly more than they earn. In the second quarter of 2008 private households spent eight per cent more than their income after tax. However, the reduction in private consumption, the increase in real income and lower taxes in 2009 mean that during the first quarter of 2009 we will see disposable incomes coming more in line with private consumption. Consumption more in line with disposable incomes Still high investment level It has typically been observed that private consumption rises relative to income when the economy is booming, only to fall again when the economy is in a less positive state. However, the adjustment between income and consumption has come much faster this time. This is partly due to a much faster adjustment of private consumption, but not least due to lower taxes and the development of prices during the current economic backlash. All in all this has meant a much more favorable development in real income. During the downturns of 1987 and 1999 prices rose while they have fallen in the last part of 2008 and early in 2009. Furthermore, in 1987 and 1999 taxes were increased and now they are being reduced. All in all, this means that the adjustment between income and consumption during the current backlash is expected to take about three quarters, while the adjustment took seven years in 1987 and five years in 1999. It is not clear whether the rapid adjustment between income and consumption is due solely to decisions made by households themselves or the adjustment in consumption has been imposed on them. On one hand it has become much less attractive to borrow in order to finance consumption and as a natural consequence the amount of new loans therefore has decreased. The financial crisis, on the other hand, also means that many people are unable to obtain the loans needed in order to finance their consumption. It is probably a combination of restrictions on loans and a lower urge to borrow that has led to this very rapid adjustment of consumption. Level of investments remains high During the most recent economic downturn from 2001 to 2003 the decline in investments in machinery and equipment was surprisingly small. A somewhat similar development in connection with the current recession is expected. The economic downturn will undoubtedly lead to a lower level of investments. But the level of Danish wages continues to be significantly and increasingly higher than wages abroad. This suggests that substantial labor-saving investments will be made. Investments which will curb the decline in investments in machinery and equipment. Therefore, the expected decline in investments in machinery and equipment is only of slightly above five per cent in 2009. The total of business investments is expected to decline by 6.4 per cent. 3
It must be stressed that the development in investments is subject to significant uncertainty. In most other countries, a considerable decline in investments is expected, and it cannot be ruled out that Denmark will experience something similar. If businesses experience restricted access to credit a significantly larger decline in investments than predicted in this forecast must be anticipated. Lack of labour is diminishing fast Significant turnaround in the labor market In November 2008 unemployment rose for the third month in a row after having been declining significantly since late 2003. The financial crisis and the economic setback are thereby being reflected in the labor market. The recent growth of unemployment combined with a declining economic growth indicate that we are facing a substantial reversal in the labor market. This is supported by several indicators of labor market trends. Thus, the number of newly advertised job openings on the Internet has been on rapid decline in recent months and there are fewer vacancies than before. At the same time business expectations with regards to employment and constraints on production caused by labor shortages have diminished significantly. Rising - but still rather low - level of unemployment The recent surge in unemployment is expected to be followed by further increases in unemployment by 2010. The unemployment is expected to increase from the current level of 1.9 per cent to 3.2 per cent in 2009 and 5.3 per cent in 2010. The growth in unemployment, in the years to come means that the economic pressure on the labor market is on decline. In 2009 the unemployment rate is expected to be slightly below the level of structural unemployment (the level of unemployment which is compatible with a steady development in wages and prices), while unemployment in 2010 is estimated to be higher than the structural level. 4
Unemployment 0 persons 0 persons 300 300 250 250 200 200 150 150 50 50 0 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 0 Source: Statistics Denmark and Confederation of Danish Industry Employment increased by 76,000 individuals from 2006 to 2007, and with a level in 2008 which is roughly the same as in 2007, the employment rate is at a historic high level. In 2009 and 2010 employment is expected to decrease by a total of 130,000 individuals. The labor force has increased considerably in 2007, but is estimated to have decreased by 27,000 individuals in 2008. In 2009 and 2010 the labor force is expected to decrease by 25,000 individuals and 8,000 individuals respectively. Contraction in the labour force The decline in the labor force in the years to come is partly due to demography which will result in fewer individuals engaged in employment. At the same time a lower recruitment of foreign labor and an increase in the number of individuals engaged in educational activation schemes are estimated to contribute to the decline in the labor force. Moreover, a negative contribution to the labor force in 2009 deriving from the general economic downturn and fewer job openings, which encourage more people to take an education, is expected. 5
Labor market Anunal changes, 0 persons 2007 2008 2009 2010 Demography -6-6 -4-3 Early retirement frequency 2 2 2 2 Educational activation schemes 5 2-6 -8 Employment stimulating initiatives 3 3 7 1 Foreign labor 11 5-3 0 Other (incl. Business cycle trends) 1 29-33 -21 0 Labor force 44-27 -25-8 Employment 76 1-66 -64 - private 79 5-73 -65 - public -3-4 7 1 Unemployment 2-32 -28 41 56 1 During booms the labor force tend to increase due to ex. students entering. 2 Acording to the new method unemployed persons on holiday no longer count as unemployed and social security recipients is registrered acording to matchcategories (1-3). Surplus on current account will remain Balance of payments and public finances The import surge has in recent years been very high due to a limitation of capacity in the Danish economy. A limitation which was first and foremost due to a shortage of skilled labor. As the pressure on the labor market decreases, imports are expected to decline relative to demand. Imports are therefore expected to decrease to the same extent as exports measured in quantities. At the same time, the prices on imported goods and services are expected to decrease more than prices on exports, which is a natural consequence of the significant weakening in Denmark s competitiveness. All in all, it means that the current account will only be weakened slightly. Domestic Market Shares Fixed prices 1992= 1992= 105 105 90 90 85 85 80 92 93 94 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 80 Note: Domestic market share is calculated as non-exported Danish production as a percentage of total domestic demand. Source: Statistics Denmark and Confederation of Danish Industry Public finances into deficit In many countries the economy has built-in so-called automatic stabilisers, which means that the economic decline will be mitigated to a certain extent. An example of such a stabiliser is the unemployment benefit, which guarantees people a certain income in case of unemployment. In Denmark the automatic stabilisers are more extensive than in an all other countries, partly because the benefit payments etc are relatively high. On 6
the other hand, this also means that public finances in Denmark are very susceptible to fluctuating economic trends. The backlash, therefore, implies that recent years large surplus on public finances, in a short period of time, are being turned into deficits. A deficit on public finances of approximately one per cent of GDP in 2010 is expected. The deficit may well be even bigger, as previous economic downturns have been known to cause deficits considerably larger than what the economic models anticipate. 7