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OUTLOOK for the DANISH ECONOMY — JUNE 2021 Danish Economy Is Heading for a Mild Boom

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OUTLOOK for the DANISH ECONOMY — JUNE 2021 Danish Economy Is Heading for a Mild Boom ANALYSIS DANMARKS NATIONALBANK 23 JUNE 2021 — NO. 15 OUTLOOK FOR THE DANISH ECONOMY — JUNE 2021 Danish economy is heading for a mild boom High growth is expected to continue in the coming years PROJECTION Consumption rose sharply after reopening in March. Exports of goods have benefited from a Danmarks Nationalbank is publishing an extra- global manufacturing upswing and now exceed ordinary projection in the pre-pandemic level. Growth is expected June due to the great impact of the corona- to continue the coming years. The economy is virus situation on signifi- expected to be in a mild boom in 2023. cant parts of activities in society. The Government should be prepared to tighten fiscal policy The recovery is supported by high private de- mand, and there are signs of bottlenecks build- ing up in manufacturing, construction, and some parts of the service industries. The Government should be prepared to tighten fiscal policy more than already planned. Need for measures to strengthen robustness in the housing market Soaring house prices may lead to an accelera- tion in credit growth and increase the risk of large fluctuations in the housing market. Amorti­ sation requirement for highly indebted house- holds and a reduction of the interest deduction will reduce vulnerability of the housing market and strengthen the robustness of the economy. ANALYSIS — DANMARKS NATIONALBANK 2 OUTLOOK FOR THE DANISH ECONOMY – JUNE 2021 Outlook for the Danish economy Rapid increase in activity since reopening in spring Large increase in card turnover after Chart 1 The reopening of Danish society is in full swing. reopening Many restrictions have been eased and the number Index, January 2020 = 100 of hospitalised coronavirus-infected persons has 160 decreased significantly. The overall activity level has Supermarkets 140 nearly recovered to the pre-pandemic level sup- ported by a strong upswing in private demand. 120 100 Consumption has quickly recovered following the 80 Total reopening of society, and housing market activity is 60 high with many sales and large price increases. Con- 40 currently, exports are supported by a global manu- Restaurants and bars Housing-related 20 facturing upswing driven by a shift in consumption products and services 0 towards goods. Q1 2020 Q3 2020 Q1 2021 Nearly all industries have reopened, but activity in Note: Data is seasonally adjusted and 7-day moving average. some service industries will still be directly or indi- Card turnover is seasonally adjusted using a regression rectly hampered by, for example, travel restrictions method. Source: Nets Denmark A/S and own calculations. or restrictions on opening hours and distancing requirements over the summer. At the same time, activity is high in manufacturing and construction with signs of bottlenecks building up. There are thus large differences in activity across industries. March, when parts of the retail trade were allowed to open, and card turnover was back to the pre- High private demand and more easing of restric- pandemic level already in the middle of March, see tions over the summer provide a sound basis for chart 1. the Da nish economy returning to normal capacity utilisation at the end of the year. GDP is expected to During the pandemic, consumption has been highly increase by 3.3 per cent in 2021, and gradually enter limited by restrictions and fears of infection. At the a mild boom in the following years. same time, relief packages contributed to a contin- ued increase in household income from wages and Signs that consumption transfer incomes. In addition, household liquidity patterns are reverting was supported by the disbursement of frozen hol- Private consumption was hit hard again during the iday allowance1. Household savings therefore rose winter lockdown and was the main reason for the sharply and have provided a sound basis for a quick drop in GDP of 1.3 per cent in the 1st quarter of recovery of consumption.2 2021. However, consumption quickly recovered in 1 The disbursement of holiday pay is estimated to boost consumption by an overall amount of kr. 22.5 billion. As of 26 May, a total of kr. 52 billion has been disbursed after tax, and a marginal propensity to consume of 43 per cent has been assumed. See Henrik Yde Andersen, Spending when illiquid savings become liquid: evidence from Danish wage earners, Danmarks Nationalbank Working Paper, No. 161, Sep- tember 2020 (link). 2 See Svend Greniman Andersen, Nicolai Risager Christensen and Ras- mus Mose Jensen, High savings during corona were driven by restric- tions rather than precautionary consumers, Danmarks Nationalbank Economic Memo, No. 2, February 2021 (memo available in Danish only). ANALYSIS — DANMARKS NATIONALBANK 3 OUTLOOK FOR THE DANISH ECONOMY – JUNE 2021 Consumption of services has been particularly hard hit by the restrictions, and consumption has instead Exports of goods are higher Chart 2 been shifted towards goods. As more service indus- than before pandemic outbreak tries have been allowed to reopen, the consump- Index, 4th quarter 2019 = 100 tion of a number of services has increased sharply, 105 resulting in a more even distribution of consumption Services Goods between goods and services. This indicates that 100 demand is largely returning to the pre-pandemic Total 95 patterns. 90 Total card turnover increased further during the 85 spring and is just above 10 per cent higher than before the pandemic at the beginning of June. The 80 recovery of consumption means that imports of Export market index 75 goods, in particular, have also recovered quickly. 2015 2016 2017 2018 2019 2020 2021 Global industrial expansion Note: Exports are stated in volumes. The export market index has supported Danish exports of goods covers imports in volumes of goods and services among Danish trading partners. The international economy has performed much Source: Statistics Denmark, OECD and own calculations. better during the lockdown over the winter than in spring 2020. Fiscal and monetary policy have again supported households and companies, and the restrictions have been more targeted than in spring 2020. Especially manufacturing has been less through May, and confidence indicators abroad also affected this time. show further increases in activity in Denmark’s export markets with renewed growth in service industries. Like households in Denmark, foreign households have shifted their consumption towards goods, Moderate underlying price pressures despite higher which has contributed to global manufacturing commodity prices and supply chain disruptions upswing. The manufacturing upswing supports Global manufacturing upswing has increased the world trade in goods, as the manufacturing industry demand for freight and commodities, and the reper- is more integrated in international supply chains cussions from the lockdown during the first wave than service industries. In addition, confidence indi- of the pandemic have created major disruptions in cators show that the manufacturing upswing may international supply chains. Many companies in both be boosted by many companies needing to rebuild Denmark and abroad report a shortage of materials their stocks after disruptions in global supply chains and long delivery times. High demand for intermedi- and lockdown closures in 2020. ate consumption in manufacturing and supply chain problems have pushed up freight rates and prices of The global manufacturing upswing has provided a a range of commodities. sound basis for Danish exports to continue to recover over the winter. Exports of goods increased by 10.6 Higher energy prices have led to increases in Danish per cent in the 1st quarter of 2021 and are thus above consumer prices, and the annual rate of increase in the pre-pandemic level, see chart 2. This increase con- the EU Harmonised Index of Consumer Prices (HICP) tributed significantly to the overall Danish economy rose to 1.9 per cent in May. Energy prices contribute being hit less hard than in spring 2020. However, total to the annual rate of increase due to temporarily low exports are still weaker than before the pandemic, oil prices in spring 2020, and this contribution will in as parts of the service exports, such as travel and air all probability ebb away during the summer. In addi- transport, remain severely affected by restrictions. tion, price increases are also temporarily lifted by the increase in tobacco duties. Export growth appears to have slowed slightly in the 2nd quarter, and exports saw a nominal decrease The underlying price pressure remains moderate, of 3.1 per cent in April. However, real­time indica- and higher commodity prices and freight rates have tors show high exports to countries outside the EU not yet passed through to core inflation, which, ANALYSIS — DANMARKS NATIONALBANK 4 OUTLOOK FOR THE DANISH ECONOMY – JUNE 2021 indeks, januar 2020 = 100 Nettotal Employment high in construction with signs of bottlenecks building up Chart 3 110 25 Beskæftigelse Arbejdskraftsmangel Employment105 Labour shortages Offentlige 20 Index, January 2020 = 100 100 erhverv Per cent 110 40 95 Byggeri 105 35 15 10090 30 Samlet 95 25 10 85 90 20 Service 80 85 Hoteller 15 og restauranter 5 8075 10 75 5 70 0 70 15 16 17 18 19 20 21 150 16 17 18 19 20 21 Industri 15 16 17 18 19 20 21 15 16 17 18 19 20 21 Total Construction Public administration Hotels and restaurants Manufacturing Services Note: Labour shortages are own seasonal adjustment. Source: Statistics Denmark and own calculations. measured with constant taxes, rose 0.6 per cent in reopening of society in March, and, concurrently, May. Producer prices, excl. energy, have increased the number of persons on wage compensation or more heavily, but short­term fluctuations are typi- under the short-time working scheme has been cally absorbed in corporate profit margins. A larger significantly reduced. However, at the beginning of pass-through to underlying consumer prices, require June, the number of registered unemployment is still a pass-through to the wages formation.
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