Denmark: Economic growth continues to soften in Q2; government presents draft 2019 budget
August 31, 2018
According to the latest national accounts data released on 31 August by Statistics Denmark, the economy lost steam during the second quarter, after registering a weak growth print in Q1 due to a high base effect. In seasonally-adjusted quarter-on-quarter terms, the economy expanded a meager 0.2% in Q2, a deceleration from the downwardly-revised 0.3% increase recorded in Q1 (previously reported: +0.4% quarter-on-quarter).
The second quarter slowdown came amid a broad-based deceleration of the economy, both domestic- and export-oriented. Despite solid consumer confidence and a very tight labor market—unemployment reached a near decade-low in June—private consumption growth moderated from 1.0% in Q1 to 0.4% in Q2, in part because of an unfavorable base effect. Meanwhile, government spending contracted in the quarter, falling 0.5% after Q1’s flat reading. On the other hand, fixed investment growth was the most positive reading of this second quarter GDP release, which surged from 2.0% quarter-on-quarter in Q1 to 7.9% in Q2, largely on the back of important ship purchases in the freight industry. Even discounting those purchases still yields solid growth of 2.8%, indicating the trend is quite robust.
Conversely, the external sector offered a muted performance in the second quarter. Indeed, despite modest growth in service exports, overall exports fell 0.4% in the quarter as shipments of goods contracted, although the fall was more modest than in the first quarter, when exports fell 0.9%. Meanwhile, import growth moderated from 1.3% in Q1 to 0.5% in Q2, reflecting relatively soft domestic demand.
Looking ahead, the economy will likely pick up some pace in H2 2018 and beyond thanks to higher manufacturing activity, an acceleration in private spending growth and an expansion in fixed investment amid positive business sentiment. However, a rapidly deteriorating global trade environment poses the largest near-term threat, which is likely to affect key industries such as shipping, and somewhat dampen the investment momentum. Moreover, sustained employment gains and a low unemployment rate is likely to start producing shortages of workers in select sectors which could cause bottlenecks in the broader economy.
Lastly, amid healthy levels of economic activity and upcoming general elections in June 2019, on 30 August the government presented its draft 2019 budget. The proposed draft limits government spending to nearly the same level as in 2018, while setting aside DKK 700 million (approximately EUR 94 million) as a reserve to cover the costs of additional payments to the European Union in the event of a “no deal Brexit”. The finance ministry estimated that this budget would have a negative effect on 2019 GDP of around 0.2 percentage points.
Author: Joffrey Simonet, Economist