Table Of ContentOECD
ECONOMIC SURVEYS
DENMARK
JULY 1975
BASIC STATISTICS OF DENMARK
THE LAND
Area (1000 sq.km) 43 Population, 1970 (1030) 4938
Agricultural area (1000 sq.km) 30 Metropolitan area (incl. suburbs) 1 380
Metropolitan area (excl. suburbs) 623
Other three main urban areas
(cxcl. suburbs) 437
THE PEOPLE
Population, 31-12-1973 (1000) 5036 Labour force, 23-10-1974 (1000) 2479
Number ofinhabitants per sq. km 117 ofwhich:
Net natural increase, Agriculture 228
average 1969-1973 (1000) 24 Manufacturing 646
Net natural increase per 1000 inhab. Building and constr. 202
(average 1969-1973) 4.8 Trade 378
Others 1025
PRODUCTION
Gross Domestic Product in 1974 Gross fixed capital formation in 1974
(Kr. million) 205041 (Kr. million): 58228
GDP per head (US dollars) 6640 Per cent of GDP 28
Per head (US dollars) I 880
THE GOVERNMENT
Public consumption in 1974 Composition of Parliament
(per cent of GDP) 21 (no. ofseats):
General government current revenue Social Democrats 53
in 1973 (per cent ofGDP) 41 Social Liberals 13
Public gross fixed capital investment Liberals 42
in 1973 (per cent ofGDP) 4 Conservatives 10
Peoples' Socialists 9
Groeland and Faroe Islands 4
Communists 7
Christian Democrats 9
Progressive Party 24
Left Socialists 4
Center Democrats 4
779
Last general election: 9-1-1975 Nextgeneralelection:atthelatest8-1-1979
FOREIGN TRADE
Exportsofgoodsandservicesaspercent Importsofgoodsandservicesaspercent
ofGDP (1974) 32 of GDP (1974) 35
Main exports in 1974 (per cent oftotal Main imports in 1974 (per cent oftotal
merchandise exports): merchandise imports):
Agricultural products 20 Raw materials
Canned meat and canned milk 5 Base metals
Industrial goods 70 Fuels 19
Other goods 5 Machinery and equipment 17
Transport equipment 7
Semi-manufactures 15
Consumer goods 13
THE CURRENCY
Monetary unit: Krone Currency units per $ US:
as at 30-6-1975 5.4781
actual average rate in 1974 6.1139
Note An international comparison ofcertain basic statistics is given in an annex table.
OECD ECONOMIC SURVEYS
DENMARK
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RETOUR BUREAU 610
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
The Organisation for Economic Co-operation and
Development (OECD) was set up under a Convention
signed in Paris on J4lh December, 1960, which provides
that the OECD shall promote policies designed:
to achieve the highest sustainable economic growth
and employment and a rising standard of living in
Member countries, while maintaining financial sta¬
bility, and thus to contribute to the development of
the world economy;
to contribute to sound economic expansion in
Member as well as non-member countries in the
process of economic development;
to contribute to the expansion of world trade on a
multilateral, non-discriminatory basis in accord¬
ance with international obligations.
The Members of OECD are Australia, Austria,
Belgium, Canada, Denmark, Finland, France, the Federal
Republic of Germany, Greece, Iceland, Ireland, Italy,
Japan, Luxembourg, the Netherlands, New Zealand,
Norway, Portugal, Spain, Sweden, Switzerland, Turkey,
the United Kingdom and the United States.
The Socialist Federal Republic of Yugoslavia is
associated in certain work of the OECD, particularly that
of the Economic and Development Review Committee.
A
"f.
The aruiu^l review ofDenmark
- bytEèOECDEafcdDevelopmentReviewCommittee
took place on 1st July 1975.
The present Survey ijias been updated subsequently.
© Organisation for Economic Co-operation and Development, 1975.
Queries concerning permissions or translation rights should be
addressed to : '
Director ofInformation, OECD
2, rueAndré-Pascal, 75775 PARIS CEDEX 16 France
CONTENTS
Introduction 5
I 1974 Development 5
Depressed spending behaviour 6
Large improvement in the real external balance 8
Continued high rate of inflation 12
Deterioration in labour market conditions 13
II Economic policy 17
Monetary policy 18
Fiscal policy 21
Budget deficit and monetary policy 24
Incomes policy 27
III Short term outlook 28
Private consumption 28
Private capital formation 30
Stock formation 34
Exports and imports 34
Domestic production and employment 35
Wages and prices 37
Balance of payments 38
IV Conclusions 40
Annexes
I Chronology of major economic policy events 43
II Employment functions for Denmark 47
TABLES
Text:
1 Merchandise,trade 10
2 Consumer prices and hourly earnings in selected OECD countries 11
3 Trends in prices 13
4 Indicators of monetary policy 20
5 Public sector revenue and expenditure 22
6 Supply and use of resources 29
7 Private sector income and expenditure 30
8 Trends in wages 37
9 Balance of payments 39
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Statistical Annex:
A Supply and use of resources (current prices) 56
B Supply and use of resources (1955 prices) 57
C Gross domestic product by industry of origin (current prices) 58
D Gross domestic product by industry of origin (1955 prices) 59
E Consumers' expenditure on goods and services 60
F General government income and expenditure 61
G Balance of payments and foreign assets 62
H Labour market and production 63-64
I Foreign trade, total and by area 65
J Imports: value, volumes, prices and by commodity group 66
K Exports: value, volume, prices and by commodity group 67
L Prices and wages 68
M Money and credit 69-70
DIAGRAMS
1 Indicators of private consumption 7
2 Imports and total demand 9
3 Labour market indicators 14
4 Development in unemployment and GDP 16
5 Development in money supply (M2) and GDP 19
6 Interest rates and consumer prices 21
7 Domestic saving-investment balance 25
8 Business surveys in manufacturing 31-32
9 Residential construction 33
10 Unit labour costs in manufacturing 36
II Trends in foreign trade 38
INTRODUCTION
During the past 12-18 months the Danisheconomy has moved from a situation
of excessive demand pressures to severe recession. Exogenous factors combined
to producealargecontractionaryimpactearlyin 1974, and theprivate sectorreacted
tothesubsequentdeclineinrealincomeandrisingunemploymentbyanunexpectedly
large reduction in spending. As balance ofpayments consideration prevented the
authorities from taking offsetting expansionary measures, total domestic demand
started to fall from mid-1974. Accumulation ofstocks to a large extent involun¬
tary temporarily cushioned the effect on GDP, but labour market conditions dete¬
riorated rapidly with unemployment rising to its highest level over the last 20 years.
As expected, the current account of the balance of payments deteriorated sharply
in the first halfof 1974but almostregained anequilibriumpositiontowards the end
ofthe year due to a marked fall ofimports. Despite an expansionary shift in the
budget stance and some relaxation ofmonetarypolicy, the outlook does not suggest
any immediate improvement in the employment situation, as real GDP in 1975
may remain virtually unchanged compared with 1974. However, a wide range of
incomes policy measures implemented inthe spring should produce a significant
decelerationin the rates ofprice and wage increases inthe course ofthe year. And
better price stability together with the low rate ofcapacity utilisation should enable
Danish industries to take advantage of the next upswing in world trade.
Part I of the present Survey outlines the main features of developments in
1974 and examines the reasons for the marked deviation of actual from forecast
trends. Part II discusses the rôle ofeconomic policy during 1974 and in particular
themonetarypolicyproblems associatedwiththelargepublic sectordeficitpredicted
for 1975. PartIIIpresentsthe 1975 short-termoutlookassumingageneral though
bypaststandardsmoderate upturnofworldtradeduringthesecond halfoftheyear.
Part IV discusses short-run demand management problems but considers also some
issues related tomedium-termstabilisationpolicies. AnnexIcontains achronology
ofmajor economic policy events, and Annex II presents a Secretariat econometric
analysis of the factors influencing the development in employment.
I 1974 DEVELOPMENT
When the Danish Economy was reviewed a year ago, it was generally foreseen
that excessive demand pressures, whichhadprevailed during 1973 and the earlypart
of 1974, would gradually give way to recessionary tendencies, mainly as a result of
three factors:
(i) the deflationary demand effect ofhigher oil prices, which were expected
to inflate the import bill by Kr. 5-6 billion, correspondingto almost 4 per
cent ofGDP and entailing a 5£per cent decline inprivate real disposable
income;
(ii) a restrictive policy stance, including:
(à) a monetary policy aimed at rates of growth in money supply and
total lending well below the expected rate ofinflation;
OECDEconomicSurveys
(b) a tight fiscal policy reflecting fiscal drag as well as discretionary
increases in corporate and indirect taxes and the introduction of
compulsory savings;
(Hi) a sharp decline in residential construction, which had already started in
late 1973.
The eflects of the expected deterioration in the foreign balance and rise in the
public sector's surplus implying an estimated 5-6 per cent decline in private real
income and a marked deterioration in the aggregate saving-investment balance of
the privât sector constituted a major uncertainty in last year's outlook. It was
assumed that private households would absorb part of the deflationary impact by
reducing the savings ratio and that private investment would hold up rather well,
at least in current prices. Moreover, compensatory price and wage increase were
not expected to exceed the mechanical "pass through" of higher import prices and
the "built-in" wage increase resulting from indexation. On this basis GDP was
expected to rise by 2è per cent between 1973 and 1974 while prices and wages
were predicted to accelerate to respectively 15 and 20 per cent.
In the event, the acceleration in prices and wages was in line with predictions,
but final domestic demand turned out to be much weaker than foreseen. Thus
private consumptiondeclinedby1\percentinreal terms comparedwithanexpected
rise of2percent, and thevolume oftotal fixed investmentfell byasmuchas 10^per
cent while a decline of 3^ per cent had been predicted. Real public expenditures
increased, but less than expected, and total final domestic demand was 3£ per cent
below the level ofa year earlier, against an expected increase of 1^ per cent. The
impact on GDP, however, was cushioned by a significant improvement in the real
external balance. The volume of imports declined by 4 per cent, while despite
aless favourabledevelopmentinworldtradeand Danishexportmarkets than expect¬
ed the rise in exports actually exceeded the predicted 5\ per cent. In total, the
changes in exports and imports added some 3J per cent to GDP-compared with
a negative contribution ofapproximately the same size in 1973. This together with
a considerable stock accumulation to a large extent involuntary prevented the
rate of growth of GDP from falling below 1 per cent.
Depressed Spending Behaviour
Thelargedeviationbetweenthepredicted and actualexpansionoffinaldomestic
demand was largely attributable to a sharp decline in consumer confidence and an
unusually hesitant spending behaviour of private consumers which, in turn, had
serious repercussions on the investment propensity ofenterprises. As mentioned
above, it was generally expected that part ofthe contractionary demand impact of
higher oilprices and themore restrictivepolicystancewould be offsetbyareduction
in the household savings ratio to some extent as an automatic consequence of a
shift in the distribution ofdisposable income in favour ofwage earners. However,
while the changeinincome distribution wasinline with expectations, the downward
adjustment ofdemand to the decline in real disposable income was much stronger
and faster than experience and conventional theories would suggest. In fact, con¬
trary to past behaviour patterns, households reduced consumption by a higher
percentage than the decline in income1, thereby initiating a cumulative adjustment
process.
Infact followingaratherflattrendduringthefirst five months real consump¬
tion dropped by more than 5 per cent between the first and second halves of 1974
1 Since the decline in real incomes mainly resulted from sharp increases in prices, the fall
inreal consumption may havebeen exacerbated by delays in theadjustment ofnominal spending
to the accelerating price rise.
Denmark
(Diagram 1). The decline was most pronounced for durable goods, especially
purchases ofautomobiles, which fell by some 70 per cent*. The downward trend of
private consumption was associated with an increase in the household savings ratio
byaround 1 percentagepoint. TentativeSecretariatestimates suggestthat,including
enterprises, the private sector's savings-investment balance in the first half of the
yearexceededthedeficitofayearearlierbyasubstantialmargin. Inthesecondhalf,
however,the deficitdroppedsignificantlymorethanexplainedbyseasonalmovements
sothatfortheyearasawholethe deteriorationinthefinancialbalanceoftheprivate
sectorwaslimitedtoKr. 1£billion,againstanexpectedriseinthedeficitofsomeKr.
1\billion. Consequently, the counterparts ofthe entire oil priceinduced deteriora¬
tionintheforeignbalanceweretobefoundinanimprovementinthenon-oilexternal
position and a decline in the savings surplus ofthe public sector. Hence, despite
the introduction ofdiscretionarymeasures to strengthen the surplus of the Central
government,thereactionsofprivateconsumersandinvestorspushedpartoftheneces-
Diagram 1 Indicators of Private
Seasonally adjusted volume figures
INDEX 1970= 100
PASSENGER CAR REGISTRATIONS ; ANNUALRATES
ISO 150
125 125
100 100
75 75
50 50
25 25
0 L 0
1970 1971 1972 1973 1974 1975
1 Expenditure onforeigncurrencyfortravel purposesdeflated bytheconsumerpriceindex.
Source: Statistiske Efterretninger.
2 Thisdevelopmentwasprobablynotonlytheresultofconsumers'reactiontothereduction
in real income and financial position, but reflected also a temporary rise in the registration duty
on automobiles; see Annex I. Moreover, reduced availability of consumer credits coupled with
higherfinancialcostsandindirecttaxesprobablyreduceddemandforanumberofdurable goods.
OECDEconomicSurveys
sary adjustment to the higher external deficit to the public sector3. The rapid
changes in spending plans and spending behaviour were also clearly reflected in
financialflows. Duringthefirsthalfof1974netlendingfromprivatebanksexceeded
the rise in deposits by Kr. 3£billion whileduringthe second half, when net lending
fell and deposits increased by more than 16 per cent (annual rate), the private non-
bank sector reduced its indebtedness to the banking sector by Kr. 6.2 billion.
While the downward trend in household spending seems to have started before
the middle of last year, the reaction of private business investment came approxi¬
mately one quarter later. According to Business Survey data, fixed investment
continued to rise in the second quarter, but showed a rather marked decline during
thethird quarter, when some 20percent ofthe firms covered bythe Surveyreported
to have revised their plans downwards. As a result, the downturn gathered further
momentum and, for the year as a whole, business fixed asset formation is estimated
to have declined by 2 '/£ per cent, compared with an initially expected rise of 6 per
cent. Despite this weak real investment picture, it is important to realise that
capital spending in current prices rose significantly faster than nominal non-wage
incomes. Since, furthermore, there was a marked accumulation of inventories,
the savings-investment deficit of the enterprise sector must have increased quite
substantially.
The building sector experienced a particularly sharp slump in 1974 after exces¬
sive boom conditions in 1972 and most of 1973. Quantitative restrictions on the
number of building permits, a ban on public investments, and limitations on the
financing of building costs through the traditional mortgage institutions resulted
in an accelerating decline in the number of building starts since the second half
of 1973. By early 1974 starts (measured by number of apartments) had already
fallen more than 40 per cent below the level of a year earlier. The downturn was
particularly severe for owner-occupied dwellings, which had expanded at an unsus-
tainably high rate during the preceding building boom. For 1974 as a whole the
number ofdwellings started amounted to only 26000, little more than halfthe 1973
level*. As completions remained high well into the second half of 1974, the year-
on-year decline in residential investment was less pronounced. Apart from the
uncertainty concerning future rules for real property taxation, the weakening of
housing demand during the year may largely be attributed to the impact ofhighe
foreign and domestic prices, which not only reduced real income but also
contributed to pushing up interest rates to an almost prohibitively high level
(Diagram 6). Moreover, the deteriorating employment situation may have made
households more reluctant to incur additional financial obligations for the
immediate future.
Large Improvement in the RealExternalBalance
Reflectingthe weakness ofdomestic demand, total imports in volume, including
services, fell by some 4 per cent between 1973 and 1974, with merchandise imports
showing an even stronger decline. Over the past 20 years, the average importelas¬
ticityoftotaldemandhasbeen 1.45,risingto 1.65inyearswhentotaldemandadvanc¬
ed at a higher than the average rate, and dropping to 1.20 in years with slow growth
(Diagram 2). Although evaluation in terms ofimport elasticity is less relevant for
asingleyearandinperiodswithnumericallysmall changesin demanditisinteresting
to note that the response ofimports to the small decline in total demand ( J per
cent) was exceptionally large in 1974. The related unusual shift of demand to
3 Between 1973 and 1974 the traditional saving surplus ofthe public sector declined by Kr.
2 billion.
4 Thenumberofstarts in 1974fell 35 percentshort ofthetargetrate of40000, established
in the housingagreement concluded inJune 1974. For further details see Annex I "Chronology
of Major Economic Policy Events".
