Economic 'boom' to hit Denmark after half a decade below zero

[COPENHAGEN] After half a decade of negative interest rates, Denmark's economy is headed for an economic "boom" and risks running out of the labor resources needed to support sustainable growth, the central bank said on Wednesday.

"The Danish economy is in a solid upswing, and as the signs of labour shortage are becoming still clearer, the structural government budget should be brought to balance within the next couple of years so that fiscal policy will contribute to stabilising the economy," Governor Lars Rohde said in a statement on Wednesday.

The warning comes despite a downgrade in the economic forecast, with gross domestic product seen expanding 1.4 per cent in 2017, versus an earlier forecast for 1.5 per cent. The bank also cut its 2018 outlook to 1.5 per cent from the 1.8 per cent predicted in September.

"The slightly lower growth expectations for the coming years primarily reflect a weakened outlook for Denmark's export markets," Mr Rohde said. Household spending is expected to drive expansion, he said.

The comments follow almost half a decade of negative interest rates that have created imbalances in Denmark's housing market, which the central bank has characterised as a worrying side-effect of its need to shape monetary policy around the krone's peg to the euro. House price developments in the Danish capital are of particular concern, Mr Rohde said.

"Copenhagen homeowners will be relatively more severely hit by rising interest rates than homeowners in the rest of Denmark," he said. The housing market in the capital is "vulnerable to sudden interest rate rises" and "there is a considerable risk that if the real price increases seen in recent years continue, they will be followed by falls of the same size," Mr Rohde said.

The bank also spent time analysing the potential fallout of President-elect Donald Trump's economic proposals. The planned fiscal spending boost has the potential to create accelerating wage and price pressure, especially if the supply of labour isn't increased, according to the Danish central bank. The reality TV star's ideas also mark a departure from tradition in that he plans pro-cyclical measures, the central bank said.

Aside from the risk of creating an "overheated" economy, such policies will also lead to growth in US government debt from an already historically high level, the bank said.

BLOOMBERG