The Danish Economy Anno 2009

The fourth quarter of 2008 and the first half of 2009 have seen the biggest fall of global GDP since the Second World War. As a small, open economy, Denmark was never going to be immune to the global climate and this was exacerbated by the fact that some of the problems which indirectly led to the credit crunch (a long consumption driven boom and historic rises in house prices) were also prevalent in Denmark. All of the above was shown up in the recent GDP figures for quarter 2 of 2009 where the Danish economy contracted by a whopping 2.6% - far more than most other developed countries. So where does the Danish economy currently stand?

Even before the credit crunch hit, GDP in Denmark was stagnant as house prices (particularly for flats in the principal cities of Copenhagen and Aarhus) fell and the long boom came to its natural end. Events following September 2008 significantly worsened the situation though and this can be seen clearly in the data. GDP is expected to contract by 4 to 5% in 2009 (predictions from OECD and Danske Bank) whereas unemployment (which was practically non-existent only two years ago with employers complaining about a lack of qualified labour) is now creeping up and is expected to peak around 8% in late 2010 (OECD). Although high compared to recent years, this level of unemployment still compares favourably to what is expected in other similar countries, for example the OECD predict unemployment in excess of 11% in Sweden by the end of 2010.

One particular problem faced by the Danish economy has been a fall in exports. These traditionally play a major part in Denmark's economic position and the worldwide trend in the last twelve months of a reduction in international trade has been a major problem. To make matters worse, Danish exports have become significantly more expensive during that time in the large export markets of the United Kingdom and Sweden. Whilst not a member of the Euro, the Danish krone is very tightly pegged against the single currency, and the depreciations of Sterling and the Swedish krona were therefore not mirrored in Denmark which created obvious problems for exporters. As an aside, the credit crunch also highlighted the potential danger of the Danish currency's current status, as interest rates were raised in quarter 4 of 2008 to protect the krone where the general macroeconomic position warranted the opposite action.

The government's finances have naturally taken a hit with surpluses of around 5% of GDP in 2006 and 2007 being replaced by expected deficits of 2.4% in 2009 and 4.1% in 2010 (OECD). Whilst this represents a significant turnaround, it should be pointed out that this deficit is substantially smaller than a number of other countries (including the UK and the USA) and that by choosing to repay the debt through the boom years, Denmark has ended up with one of the lowest national debts in the world of around 25%, which provides the government with the ability to run a deficit without major fear of a downgrade by ratings agencies.

In terms of the soft figures, there seems to be a general belief that the bottom has been reached. Although the contraction in GDP in Q2 of 2009 was worse than expected, surveys of consumer behaviour and optimism suggest a greater belief that good times around the corner. This may also be helped by the expansionary policies of the government. Consumers have, in recent months, been able to withdraw their special pension savings and from 1 January 2010 the notoriously high marginal tax rates on higher earnings will be reduced.

All the last paragraph points to a steady upturn being not too far away but the elephant in the room is the continued problem with the housing market. Although there has been a significant correction of property prices in the last two years with flats in Greater Copenhagen falling by 25-30%, prices are still high according to traditional valuation methods (for example when measuring the percentage of take home pay a worker would use to pay an average mortgage). Given the real danger of unemployment and risk aversion from banks in their lending policy, it seems likely that there could still be a further drop in housing prices and that any increases in prices will be relatively modest for the foreseeable future. As rising house prices helped fuel the recent consumption boom, it would seem that a similar situation will be unlikely in the medium term.

So, all in all, the evidence seems to show that the bottom has probably been reached, although quarter three figures may be more likely to show a decrease in the rate of contraction of GDP rather than positive growth. With unemployment expected to lag any upturn by up to a year and a half though, and the housing market likely to be stagnant, any growth is likely to be fairly weak in the first instance.

Due to its size and dependence on exports, Denmark will be heavily influenced by the performance of the global economy. To that end, the recent positive figures from Germany, one of Denmark's largest export markets is unquestionably positive. In the broader picture, despite mixed expectations in the short term, the Danish economy should be well placed in the medium to long term. The current account shows a healthy surplus, the national debt is one of the world's lowest and the workforce is generally highly skilled and multi-lingual. The most recent quarterly GDP figures may have showed Denmark near the bottom of the class but don't be surprised if it is the case in a few years time.