Denmark’s economy waits for the next move of Mario Draghi and the ECB

One of the features of our time is that politicians like to put up other countries as models for their own. Sadly for the model country that often represents a peak and the only way then is down to misquote Yazz. Rather oddly Denmark has appeared in the race for the Democratic nomination in the United States as Bernie Saunders has been praising it as a socialist utopia and Hilary Clinton also praising it. The Danish Prime Minister took the time and trouble to rebut this in a speech at Harvard.

I know that some people in the US associate the Nordic model with some sort of socialism. Therefore I would like to make one thing clear. Denmark is far from a socialist planned economy. Denmark is a market economy.

Of course as leader of a centre-right coalition he was always likely to say that. Rather intriguingly he went on to say this.

Denmark is sometimes compared to a bumblebee—at first sight it seems almost impossible that a bumblebee would be able to fly, but it does,

Some good news for Denmark

The Legatum Prosperity Index told us this earlier this week.

Denmark ranks 3rd globally in the 2015 Prosperity Index, having risen by one place since last year.
Denmark’s best performance is in the Entrepreneurship & Opportunity sub-index, where it ranks 2nd in 2015.
Denmark’s lowest rank is in the Health sub-index, where it ranks 16thin 2015.

Last week the World Bank was issuing praise as well. The Danish government reported it thus.

Denmark moves into the top 3 in the World Bank’s ‘Doing Business’ ranking published today.

Perhaps these organisations are fans of Fat Boy Slim.

I have to praise you
I have to praise you
I have to praise you
I have to praise you like I should

If we look into the detail of the Legatum Report then Denmark had in the previous 5 years  per capita GDP growth of -1.1%. Now 2013 is a bit out of date but poses a question and further research poses other questions.

While many other advanced economies have made progress on the Economy sub-index since 2009, the Nordics have been going backwards. Three of the five Nordic countries have slipped down the Economy sub-index rankings since 2009.

Looking at Denmark specifically whilst its unemployment rate has fallen it has done so more slowly than the UK and whereas pre credit crunch it had a lower unemployment rate it is now higher. Interestingly the Lego Group is doing well expanding and creating jobs. Can it help? Yes but it is mostly doing this according to its update.

The factory in Mexico is planned to undergo a massive expansion, adding up to 190,000m2 to the factory……The LEGO factory in Nyíregyháza, Hungary, is also planned to undergo significant expansions.

Mimicking the Japanese model?

The Bumblebee

Currency Peg

Denmark has a sort of semi-detached relationship with the Euro as it has a currency peg. So as I pointed out at the time the Danish Kroner will have been pulled downwards just over a week ago when the “Open Mouth Operations” of Mario Draghi talked the Euro lower. This is back on the agenda this morning as the Euro dips into the 1.09s versus the US Dollar taking the Kroner with it. So whether the like it or not the Danes have found themselves with a depreciating exchange rate courtesy of the ECB.

If we switch to strains in the exchange-rate with the Euro then the Nationalbanken had been able to reverse around 2/3rds of the intervention it had made around the turn of the year. Except we now see that the Kroner is dipping again in response to the recent Draghi promises. Is there a Lego version of what is being called Draghi’s christmas train?

The currency peg has become ingrained as a way of life in Denmark but if it did not exist would you start one now? I would suspect not although of course there are always going to be issues being so economically close to the troubled behemoth which is the Euro.

Negative Interest-Rates

One of the ways that Denmark stabilised its currency earlier this year was to cut interest-rates. It had several goes before agreeing with Switzerland that -0.75% was the way to do it. Accordingly Nationalbanken members may have got some of their breakfast bacon caught in their throat or spluttered into their coffee as they read Mario Draghi’s interview with Il Sole 24 Ore. if he does carry out the hints of further deposit-rate cuts then Denmark will find itself moving towards and maybe reaching -1%.

The Danish government bond market has also been affected and the two year yield is -0.08% so it is yet another country which is being paid to borrow which is presumably why it issued a 2018 bond earlier this month. In a way the fact that a bond with a 0.25% coupon replaced one that had a 2.5% one speaks volumes.

The housing market

If you slash interest-rates into the icy cold negative zone then you risk trouble and the latest review from the Nationalbanken suggests it is worried.

House prices are forecast to rise by 6 per cent
this year, and much of this increase has already
taken place

Indeed you may spot below the use of a word that has been redacted from most central banking dictionaries and lexicons.

price increases for owner-occupied homes remain high. The highest increases have occurred in the Copenhagen area and to a slightly lesser extent in other cities. Especially the rate of price increase for homes in certain parts of the Copenhagen area is unsustainable, and there is a risk of a local house price bubble.

The banks do seem able to lend for at least one purpose.

Total lending by banks and mortgage banks to
households and non-financial corporations grew
by kr. 17 billion from March to July.
The increase is mainly attributable to lending
by mortgage banks to households.

There has been something of a boom bust cycle already in the price of owner occupied flats as the 100 of 2006 fell to below 75 in 2009 and the trod water. However things picked up in 2012 around the time of the “whatever it takes” speech and now if I am reading the chart correctly we are around 104.

What happens next? Well we do get a hint.

This indicates that the low interest rates have not yet been fully factored into house prices.


If we continue with the animal imagery then the Danish economy has some of the features of a Swan because if we peruse the quote below after seeing all the international praise all looks calm.

GDP was 1.7 per cent higher in
the 1st half of 2015 than one year earlier.

Yet if we move to the currency and interest-rate situation we get a very different emphasis because a stable serene Swan does not need negative interest-rates. Is there a type of Swan event which covers this? Well if interest-rates get forced lower and house prices pushed higher then it will be time for the delightful Taylor Swift.

I knew you were trouble when you walked in
So shame on me now
Flew me to places I’d never been
Now I’m lying on the cold hard ground
Oh, oh, trouble, trouble, trouble
Oh, oh, trouble, trouble, trouble

Update midday

I note that the UK current account is hitting the newswires a bit today so here again is a link to my critique of the data series and methodology.