Can negative interest-rates prevent a recession in Denmark?

One of the features of the response to the credit crunch was a general reduction in interest-rates. This was followed later by Quantitative Easing and around the Euro area in particular by further reductions in interest-rates. This was evidenced by Denmark where its Nationalbanken cut its current account rate to 0% in June 2012 where it remains. Even more so by its certificate of deposit or CD rate which moved into negative territory in July 2012 at -0.2% and is now -0.65% having been as low as -0.75%. So after raising interest-rates almost unbelievably as the credit crunch hit the Nationalbanken became an enthusiastic cutter of them and before we get to the impact on the Danish economy we need to remind ourselves that there is an external or foreign restraint at play here.

Denmark maintains a fixed-exchange-rate policy vis-à-vis the euro area and participates in the European Exchange Rate Mechanism, ERM 2, at a central rate of 746.038 kroner per 100 euro with a fluctuation band of +/- 2.25 per cent.

So it is no great surprise to note that Danish interest-rates were in effect sucked lower by the impact of Mario Draghi’s “Whatever it takes ( to save the Euro) speech and policies. Of course all interest-rate policies have external and internal economic implications but when you have such an explicit one the external takes over at times of stress. For choice I would call it a pegged currency rather than fixed as whilst it is unlikely it could more easily change the rate than it could leave the “irreversible” Euro if it had joined it. Anyway here is how the Nationalbanken  reviewed events back in the summer of 2012.

For the first time in its nearly 200-year history, one of Danmarks Nationalbank’s interest rates is negative. Negative monetary-policy interest rates are also unique in an international perspective.

They were not lonely for long!

The economic situation

At the end of last month the Nationalbanken told us this.

The Danish economy is in a boom where the
growth outlook is slightly better than the potential……. There is consensus that labour market
pressures will intensify.

We get the picture although the discussion with the Danish Economic Council did have something from the left field.

In addition, the calculation assumes an increase in the retirement age by 12 years relative to today.

Really? It seems for best that they think that the public finances are in good shape. Although I note that the enthusiasm for easy monetary policy does not spread to fiscal policy.

This should not be perceived as scope for fiscal policy accommodation within a foreseeable time horizon. The cyclical position must be taken into account.

Returning to the economic situation we were told this back in March.

The upswing continued in the 2nd half of 2017 and the Danish economy has now entered a boom phase. Labour market pressures have increased, but so far the upswing has been balanced.

That is Danmarks Nationalbank’s conclusion in a new projection of the Danish economy, in which growth in the gross domestic product, GDP, is expected to be 1.9 per cent this year, 1.8 per cent next year and 1.7 per cent in 2020.

We need a caveat for those who think that these days we need recorded growth of 2%  per annum just to stand still but Nationalbanken Governor Lars Rhode is not one of them.

The Danish economy is booming

In fact the outlook is so good that the brakes may need to be applied although it is revealing that Governor Rhode seems to have forgotten that the task below is usually considered to be the role of monetary policy because it is more flexible.

So the government should be prepared to introduce preventive fiscal tightening at short notice if there are signs that the economy is overheating.

The boom

We get a new perspective on the concept of boom if we note that at current prices the GDP of Denmark was 537.9 billion Danish Krone in the first quarter of 2017 and 537.3 billion in the first quarter of this year. This was driven by this.

Gross domestic product fell 0.6 percent in the third quarter from the previous three-month period, Statistics Denmark said on Thursday ( Bloomberg).

In fact we know that on the measure looked at above it fell by 0.8% and unknown to Bloomberg back then it had also fallen by over 1% in the second quarter so there had in fact been a recession in the boom. How can this be? Well there was an element of the Irish problem.

The reason is primarily a large payment of a Danish owned patent which is temporarily accounted for as service exports in Q1 2017. That leaves Q1 GDP at a massive 2.3% q/q growth and Q2 at -1.2%. Q3 turned out even worse than previously suggested at -0.8% but it is largely attributed to negative stock building and the above mentioned sudden stop in car sales. ( Danske Bank ).

This meant that if you looked at 2017 as a calendar year things looked like a boom. From the Financial Times.

Gross domestic product increased 2.1 per cent for the year overall, the country’s best performance since 2006. Jan Størup Nielsen, chief analyst at Nordea, said the country is now “running at full capacity” for the first time in 10 years, and said the solid performance “will likely continue in 2018”.

Yet if you look from the latest data then the economy is smaller than a year before! If we move to the cause here is the likely factor.

However, most of Denmark’s most valuable patents are held by pharmaceuticals companies and several economists pointed to a payment made to Danish group Forward Pharma last January. Nasdaq-listed Forward received a $1.25bn payment from US biotech Biogen as part of a dispute over patents for multiple sclerosis treatments. Forward chief executive Claus Bo Svendsen said the data showed “a nice time-wise correlation with our deal with Biogen”.

House Prices

From the Nationalbanken.

As a result of the gradual shift from bank loans to
mortgage loans in recent years, mortgage lending
continues to drive lending growth.

They will need to drive it a bit faster as at the end of 2017 there was a dip in house prices after a spell of rises which in the light of the negative interest-rates era you may not be surprised to learn began in 2012.  The 85.7 of the index was replaced by 111 in the autumn of last year but it ended the year at 109.1 . Like many capital cities Copenhagen is now under much cooler pressures than were seen before.


Let me open with this from Bloomberg yesterday.

In the world-record holder of negative rates, there’s been another eye-catching development.

Danes are richer than ever before, according to central bank data on savings and home equity. But they’re spending less, in relative terms. The gap between private consumption and household wealth is the biggest it’s been in three decades.

Those familiar with my analysis will not be surprised unlike those Bloomberg go on to quote. This is because there is a large group of losers as those who do not own property face inflation which does not show up in the Consumer Price Index which is at 102.2 compared to 100 in 2015. Whereas the winners are really only those who have sold and made a profit or more implicitly those who have used higher prices to borrow more.

So wealth is not what is used to be as we get another reminder that GDP isn’t either.

Though private consumption did inch up 0.9 percent in the first quarter, it wasn’t enough to prevent the economy from shrinking on an annual basis.  Danske says GDP growth this year probably won’t exceed 2 percent.

Furthermore will Denmark be influenced by the slowing in the UK and Euro area and with interest-rates already negative how would it respond in such a scenario?



11 thoughts on “Can negative interest-rates prevent a recession in Denmark?

  1. Hello Shaun,

    re: – “The gap between private consumption and household wealth is the biggest it’s been in three decades.”

    I do sometimes wonder at the intelligence of the top elite – I mean what were they expecting in blowing a housing bubble like the rest of western Europe?

    why would I borrow on my house for a mortgage that a Barista job could not support ?

    I guess for them its a case of “I’m alright Jack “.

    the best course would be to drop the Euro link but this will not happen as its Politics that drive the Euro and not economics .


    • Hi Forbin

      It seems that the central bankers are very unhappy that their “wealth effects” are not working. After all without them what are they left with? I have to say it surprised me that Denmark did not join the Euro as I am not sure what having a pegged exchange-rate achieves unless they felt there was little other choice.

      • Shaun, if trickle down doesn’t work they’re only left with their massive pensions! As for the pegged exchange rate, the Danish people voted in 2000 against joining the Euro in a referendum – so those in charge have used the peg to get their wish ‘despite democracy’.

    • ah I think you mean Forbin Law

      All GDP figures published are 2 % higher than reality , ie GDP of 3% pa is actually 1% pa

      All CPI(H) figures published are 2% lower than reality , ie CPI of 2% pa is actually 4% .

      As for wage growth ….. ummm Huston we have a problem….. 🙂


  2. Sbaun, thanks for highlighting the mindspeak of the leadership, CBrs and Politicians. Under financial repression indeed we have fabricant existence, where other information needs to be repressed, such as real income per capita or infrastructure fitness for use.

    It seems that drops in GDP can now be reclassified as “boom” , next falling property values will be championed as a leap forward in affordability. In the same that middle aged cyclists, “mamils” were accused of stopping other potential cyclists who had chosen to not cycle.

    And peoe have to temerity to vote for popular concepts!

    • pleanty of ” mamils ” around here – mainly in the Frimely Park A&E …….

      “next falling property values will be championed as a leap forward in affordability”

      I can see you ‘re trying for a HMG post ……..


  3. I know it is old news but the NYT story on the first negative-rate business loan in Denmark in 2015 offers some details not found in the FT story by Richard Milne that your readers are maybe more familiar with:

    It seems that in the new negative-rate regime a female sex therapist can receive a negative interest rate on her loan while a female post-graduate student must pay interest to her bank for the priviledge of holding her money with them. It’s a strange kind of social engineering indeed!
    Very interesting point you make about the difference between the four-quarter growth rate and the year-over-year growth rate of the Danish economy. Arguably the four-quarter growth rate is also too influenced by the past: it only drops from 1.3% in 2017Q4 to -0.7% in 2018Q1 because the spectacular 2.4% quarterly growth rate for 2017Q1 exits the four-quarter growth rate to be replaced by the 2018Q1 growth rate of 0.3%. Just the same, it is a more timely measure than the year-over-year growth rate, and as you say it shows that the Danish economy is hardly booming.
    Canadian real GDP increased by 0.3% (1.3% annualized) in 2018Q1, which matched the Bank of Canada’s backcast in its April Monetary Policy Report. This dropped our four-quarter growth rate from 3.0% in 2017Q4 to 2.3% in 2018Q1, much below the US growth rate for 2018Q1 and tied with Germany. Our Liberal government has been droning on ad nauseam about how Canada has the highest growth rate in the G7. Rather than give up their cherished bullet point I suspect that they will take the position that only the year-over-year growth rates really matter.

  4. I’ve given up trusting any of these gdp figures. We now see gdp influenced not only by the nonsense of imputed rents but by the settlement of a patent dispute.
    With all respect to Denmark, this does seem to fall into the “one off” category than a genuine rise in economic activity.
    I expect that it will be reclassified as one off when next year’s figures come out and require a lower baseline to prove even more growth.

    • Hi James

      The interesting part of the episode is that things are capitalised when it suits for example the patent payment of US $1.25 billion goes straight to the GDP bottom line. Whereas in other areas we are told that rents are they way to go. As GDP is an income stream should Denmark not be counting the income each year from the payment and adding the payment to wealth?

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