Tuesday, June 12, 2007

Something Rotten in Economy of Denmark

Denmark has often been hailed, particularly in the recent two years, as an economic success story. Yet while Denmark still has a relatively high level of per capita income, this relies on old achievements (Denmark was third richest country in 1970, after the United States and Switzerland) and in recent decades growth have been below average. Only briefly, during 2005-2006, when a housing price boom (with money supply and house prices increasing over 20%) fueled domestic demand did growth briefly exceed the average in the EU and the OECD.

Now, however, growth has again dipped significantly. The latest numbers shows a mere 1.8% in annual growth, far below the EU average. That number was surprisingly low, so at first I thought the real number must be higher on account of terms of trade effects. But according to the details in the data bank, terms of trade deteriorated in fact somewhat.

This low growth number makes the fact that according to the same release, hours worked rose by 3.1% even more startling. This implies that productivity must have fallen by roughly 1.5%. If this is not some form of statistical error related to GDP growth being underestimated and/or employment growth being overestimated, that is certainly ominous for the future of the Danish economy. Also ominous are the increasing tendencies of overheating as implied by high money supply and house price increases and a current account balance falling into a deficit despite a large government budget surplus.


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