The improvement in the labour market leads to increased optimism among consumers and businesses.
Hence, it is time to gradually roll back the fiscal stimulus that has boosted the economy during the downturn and has led to a currently high level of public spending in historical terms.
At the same time the growth challenge must be addressed as low productivity growth hampers the economy’s ability to grow at the same pace as employment.
We are still heading in the right direction. Thus it is also important that we as a responsible government start rolling back fiscal stimulus. The falling oil price and the many refugees, who have come to Denmark, have put pressure on public finances, and hence it is important that we use the recovery to maintain sound public finances says finance minister Claus Hjort Frederiksen and continues:
At the same time, the Government is determined on creating better conditions for increased productivity in the private sector in order to strengthen the Danish growth potential. This is at the top of the agenda for the Government this fall, alongside the second phase of the job reform, which will ensure better incentives to work.
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- The Danish economy is in a moderate upturn. Measured by GDP growth, the pace is not high but clear progress is observed in the labour market. The conditions for further progress in demand and production in the coming years are in place. GDP growth is estimated to be 1.1 per cent in 2016 and 1.7 per cent in 2017.
- The growth projection has been revised down compared to the Economic Survey from December. This is primarily due to a lower starting point for GDP growth this year as a result of a weak second half of 2015 and slightly less optimistic expectations for growth in the global economy.
- There has been progress in the labour market since end-2012. This is expected to continue over the forecast horizon, implying 52,000 more persons will be in a job in 2017 compared to 2015. There is room for an increase in employment in the coming years, without causing serious bottlenecks or general labour shortages. This is due to the prospects for a substantial increase in structural employment, which should be seen especially in the light of recent years' reform efforts.
- The basis for continued progress is good. Growth in private consumption reflects among other things increasing real wages and progress in the labour market. Along with increasing housing prices this contributes to creating room for rising consumption and housing investments. Private investments are supported by low interest rates and higher demand, but uncertainty about future growth prospects may lead companies to postpone some investments a while longer.
- Exports fell last year, but they are expected to grow again during the forecast period, supported in particular by progress among Denmark's largest trading partners, including Germany and other euro-area countries.
- The progress in the Danish economy entails a narrowing of the output gap over the forecast horizon implying a projected gap of -0.7 per cent of GDP in 2017 compared to -1.4 per cent of GDP in 2015. The employment gap is also expected to be reduced. This reflects that there will gradually be fewer spare resources available on the Danish labour market.
- The narrowing of the output gap implies that accommodative fiscal policy must be gradually rolled back and normalised. Since the monetary policy stance is expected to remain very expansionary throughout the forecast period this increases in itself the need for tightening fiscal policy. The structural deficit is projected to be reduced from 0.7 per cent of GDP in 2015 to 0.4 per cent of GDP in 2016 and 2017. This includes the technical reduction of public consumption from the December forecast of DKK 2 bn. in 2017.
Read more about Economic Survey, May 2016.