Danish Economic Council cuts GDP growth forecasts on fall in private consumption

May 31, 2007 - The Danish Economic Council said it has cut its GDP growth forecasts for 2007-2009 because of a fall in private consumption.

It said private consumption fell in 2006 and indicators show this has continued into 2007.

However, the council expects private consumption to show rising growth from next year as a result of the greater wealth resulting from the strong rise in house prices over recent years.

It put 2006 private consumption growth at 3.4 pct, compared with its estimate of 4.5 pct in its last report in December.

Private consumption growth in 2007 is now forecast at 1.8 pct, down from the council's previous forecast of 3.1 pct. In 2008, private consumption growth is expected at 2.4 pct, the same as in the previous forecast, and at 2.5 pct in 2009, compared with 2.3 pct previously.

The council now sees GDP growing by 1.8 pct in 2007 and by 1.4 pct in both 2008 and 2009. The previous forecasts saw GDP growing by 2.1 pct, 1.6 pct and 1.6 pct respectively.

At the same time, the council adjusted its unemployment, inflation and balance of payment forecasts.

The council now sees the number of unemployed at 106,000 in 2007, rising to 110,000 in 2008 and 114,000 in 2009, but these estimates are lower than the previous forecasts of 114,000, 117,000 and 119,000 respectively.

It said the unemployment figure of 110,000 at the end of 2006 is about 30,000 below the structural level. Demand for labour will remain at a relatively high level in the coming years, but with a slight rising trend.

Inflation in 2007 is now seen at 2.0 pct, up from 1.8 pct in the previous forecast and driven by rising domestic costs derived from increased growth in pay. In 2008 inflation will be 2.0 pct, the council said, down from its previous forecast of 2.1 pct. For 2009, the forecast remains unchanged at 2.2 pct.

The balance of payments surplus will fall more sharply in the coming years than previously forecast, with imports rising faster than exports to meet strong domestic demand, the Economic Council said.

It now sees the surplus at 30 bln dkr in 2007, a rise from the previous forecast of 28 bln dkr. But the surplus will fall to 23 bln dkr in 2008 and to 10 bln dkr in 2009, from forecasts of 26 bln dkr for both years previously.

The Economic Council sees the Danish economy at close to its capacity limit and this, together with weaker growth in the major export markets, means a weaker development in exports.

The possibility for increasing production through increased employment - through lower unemployment or a larger workforce - is limited without new initiatives in labour and tax policies or an increased influx of foreign workers, the council said.

A greater-than-expected increase in demand for labour implies a real risk of pay rises that are higher than the council's current forecasts. This will weaken the country's competitive abilities as productivity is not rising at the same rate. The council said there is therefore a risk that the present boom will be followed by a longer period with low growth and rising unemployment.

The Economic Council added that Denmark's demographic development in the coming years will put pressure on the public finances and, in combination with a comparatively low development in productivity, will lead to economic growth that is considerably lower than in peer countries.

The council said a new, medium-term plan for Denmark's economy towards 2020 should contain targets both for growth in the labour force and for tax and public spending policies. This plan should also contain benchmarks for public expenditure, including service costs and transfer incomes, as a share of GDP, rather than the current, narrower definition for managing public spending.