Abstract
This 1999 Article IV Consultation highlights that the Danish economy continued to perform well in 1997–98. Real GDP growth of about 3 percent remained above potential and unemployment fell to 6 percent, less than half its level only five years earlier. Consumer price inflation remained subdued at slightly below 2 percent. However, capacity constraints became more evident and the external current account balance showed a deficit—for the first time since 1989—of 1.4 percent of GDP. Also, at 4½ percent, wage inflation remained higher than in the main trading partner countries.
This statement provides information that has become available since the staff report for the 1999 Article IV consultation with Denmark (SM/99/179) was issued on July 15, 1999. This information does not alter the thrust of the staff appraisal.
1. According to recently released data, real GDP growth slowed to 1 percent in the year to the first quarter of 1999. This is slightly lower than the 1.3 percent growth rate expected by the authorities and the staff for the year as a whole. However, part of the growth slowdown in the first quarter of 1999 reflected a reversal of the high level of Stockbuilding in 1998, which is not expected to continue. Consumer confidence improved in May but remained negative.
2. Monthly data indicate a steady improvement of the external current account. The April 1999 data (released July 27) show a narrowing of the cumulative 12-month deficit to DKr 5 billion. (The deficit in 1998 was DKr 14.7 billion.)
3. Price increases continue to exceed slightly inflation in the euro area. Headline inflation edged up to 2.4 percent in June (1.9 percent on an EU-harmonized basis), while core inflation remained stable at 3 percent. Housing prices continued to increase in real terms in the second quarter of 1999.
4. Evidence of a tight labor market persists. Wage increases remained higher than in trading partners, at 4.7 percent in the year to the first quarter of 1999, and unemployment declined to 5.7 percent in June.
5. The krone weakened slightly vis-à-vis the euro during July, but remained above its central rate and in nominal effective terms it strengthened, reversing part of its depreciation earlier in the year. Meanwhile, long-term interest rates have risen markedly since February, contributing to a welcome firming of financial conditions. Gross official foreign exchange reserves reached a new record high of DKr 160 billion at the end of June 1999, but declined by DKr 3 billion in July.