DI Analyses

DI forecast: Shutdown leads to new economic downturn

Both at home and abroad, we have seen new shutdowns resulting in further decline in economic activity. How-ever, there are signs indicating the impact will be smaller than during the first shutdown. The vaccines bring hope of a fairly rapid reopening of the economies. Nevertheless, Danish economy is only expected to grow by 1.5 percent in 2021, followed by stronger growth in 2022.

Danish economy is in the midst of a new downturn in the first quarter of 2021. The shutdown of large parts of the retail industry, restaurants and liberal professions is reducing the opportunities for consumption and is thus sending private consumption into reverse. Similar restrictions and shutdowns abroad alongside travel restrictions are also resulting in a new dip in exports.

Source: Statistics Denmark and Confederation of Danish Industry

We will not see the expected recovery of the economy, until the restrictions are eased again. Vaccines are being rolled out in Denmark and alongside declining infection rates a gradual reopening is expected sometime during the spring. On that basis we expect a relatively strong level of growth in the second and third quarter of 2021 as a result of huge consumer savings and of a re-establishment of contacts to important export markets.

After a decline of 3.7 percent last year, it is estimated that the Danish economy will grow by 1.5 percent in 2021 and by 2.8 percent in 2022. As a result, employment will be 27,000 individuals higher than in 2020. During 2022 an increase in employment of an additional 37,000 individuals is expected. However, enormous uncertainty persists. Should the vaccines be delayed or should we be affected by new mutations resistant to vaccines, the easing of the restrictions are likely to be postponed and it will be a long time before we are able to resume growth in the economy.

Source: Statistics Denmark and Confederation of Danish Industry

Companies are hopeful for an imminent reopening. Despite more far-reaching restrictions and a longer shutdown than last spring there has not been a significant decline in business confidence. This is also the case for consumer confidence. This testifies to the fact that businesses and consumers are beginning to see a glimpse of light at the end of the tunnel. However, we must first get through the first quarter, where the companies in DI’s Virksomhedspanel (a business panel consisting of DI company members) estimate that the total turnover will be DKK 85bn lower than in the first quarter of the previous year. It should be remembered that the activity did not decrease until the end of the first quarter of 2020.

Source: NETS Denmark A/S via National Bank of Denmark

There are big differences between industries. Retail is overall expected to return quickly sustained by consumers’ large savings and the extraordinary payment of holiday pay. However, consumptions composition has changed significantly as has purchasing patterns. A number of professions in the service sector will probably feel the effects of the crisis for a long time to come. This applies not least to the parts of the service sector, where customers still for a while to come have to avoid activities with large assemblies. The reopening is also expected to come too late for example for the travel industry and for concert organizers not allowing them enough time to establish a full-scale program for the second half of 2021.

Our estimate is that the downturn will be less significant in the first quarter of 2021 than in the second quarter of 2020. An estimate that is also in line with the companies’ expectations collected by Statistics Denmark’s. Many companies are much better prepared this time around, hence far fewer companies have a very pessimistic assessment than it was the case last spring.

The first part of the corona crisis has helped lift companies’ digital competencies. Businesses and their employees have become better at working from home, while many companies have also developed their online channels. In addition, an increasing number of consumers have adopted the use of online sales channels. Thus, it has become somewhat easier to keep the company’s production and sales running despite the shutdown.

Furthermore, the companies have been better able to predict the second wave and have thus been able to ensure sufficient inventories. Moreover, during the first wave, many companies abroad were closed down completely. This broke companies’ supply chains and at the same time reduced demand from abroad. Fortunately, we do not see the same trends in this shutdown as companies abroad generally have remained open.

Note: Changes in stocks as a percent of GDP in the previous year

Source: Statistics Denmark and Confederation of Danish Industry

Travel restrictions curb exports

It is of the utmost importance for Danish exports that companies abroad remain open, as we have many subcontract deliveries to the industry, to wholesale and to construction on export markets.

The sharply tightened travel restrictions are a major obstacle for Danish export companies. Restrictions that have hit aviation and tourist revenues particularly hard. But many other companies are also affected negatively by travel restrictions. The companies are experiencing difficulties getting salespersons, technicians and fitters abroad and back home or with getting migrant employees to Denmark, which makes it difficult to pick up and complete orders. In January results from DI’s Virksomhedspanel showed that companies affected by travel restrictions on average also had the largest decline in revenue in the first quarter.

Source: Statistics Denmark and Confederation of Danish Industry

Exports have been hit hard by the corona crisis. Last year, exports declined by DKK 110bn corresponding to just over 8 percent in current prices. Exports are taking a new dive in the winter months and are not expected to pick up again until some more restrictions are lifted, and society starts reopening which we assume will happen some time during the spring. 2021 kicks off from a very weak starting point, leaving little hope of more than three percent growth in exports in 2021, followed by growth of approximately seven percent in 2022. Exports will not have resumed the same level as prior to the corona crisis until the last half of 2022.

Among exports, the exports of goods have made it through the corona crisis the best and will be among the fastest to return to pre-crisis levels. Our large exports of pharmaceutical products and food have helped sustain our exports of goods. Exports of services have a much longer way back to more normal levels. This applies not least to tourist revenues, which last summer dropped to its lowest level in 30 years. Although we expect a gradual reopening during 2021, it will be too late to bring tourism back to the same level as prior to the corona crisis already this year. This will probably not happen until the end of 2022.

Private consumption has been hit by the shutdown

The second shutdown has placed extensive restrictions on private consumption in Denmark. Purchases of goods and services from stores, liberal professions and from the experience industries took a sharp decline since the first phase of the new shutdown in early December.

Figures for credit card turnover from the central bank of Denmark on the basis of reports from Nets Danmark A/S indicate, however, that consumption has decreased by about 10 percentage points less during the second shutdown than during the first shutdown last year. Indicating that Danes have become (somewhat) accustomed to online shopping at a time when many stores are closed. At the same time, it is a sign that Danes still dare spend money and are not nervous about the long term effects on their private economy. Consumers’ assessments regarding their private economy and Danish economy on the longer term as a whole, are not as negative during the second shutdown as during the first. It is therefore our assessment that private consumption will be less affected by the second shutdown, despite the fact of restrictions being even tougher.

Despite the economic challenges several businesses face, households’ private economy is overall still in good shape. Following the unprecedented corona shock last spring, both housing market prices and stocks have risen rapidly, while compensation schemes for employees and self-employed have helped sustain household incomes. At the end of the third quarter of 2020, house prices rose by 3.8 percent compared with the same time the year before, while households’ net financial wealth has increased by 5.5 percent during the same period. Household’s disposable income has increased by 2.0 percent in current prices since last year.

Anm.: Households both comprises private households and non-profit institutions supplying households

Source: Eurostat, National Bank of Denmark, and Statistics Denmark

Alongside the payment of the remaining two weeks’ “frozen” holiday pay at the end of March the Danes’ large savings during the crisis will help provide the basis for a strong recovery in private consumption together with the rollout of vaccines and the reopening of the society in the coming months. We therefore expect private consumption to return to the same level as prior to the crisis in the second half of 2021.

Source: Statistics Denmark and Confederation of Danish Industry

Increase in private investments in the coming years

Ever since the corona crisis hit, a high level of uncertainty has put a damper on investments both domestic and abroad. Up until now, it has primarily affected companies’ investments in equipment such as means of transportation and machinery, which are more easily put on hold than e.g. major construction projects, where investments typically react with some delay. However, the decline has been smaller than feared, and in the autumn of 2020, we saw a regain of some of the lost.

However, recent extensive shutdowns and the prospect of a low level of growth abroad mean that some companies, are somewhat prudent and therefore have a precautionary approach while at the same time the risk of lacking capital are likely to hold back and postpone their investments in equipment. The subdued expectations regarding investments are reflected in a survey carried out among DI member companies, which shows that companies entered 2021 with mixed expectations regarding investments and that many SMEs expect to have to step on the brakes when it comes to new investments.

Looking ahead, business investments are sustained by the expected recovery of the economy. In addition, a so-called “investment window” has been introduced as part of the agreement Grøn Skattereform (Green Tax Reform) which implies that the basis for depreciation for private investments in fixed assets is increased by 16 percent until the end of 2022. This should contribute to investment activities starting to pick up again as the economic situation improves.

Total business investments (vessels excluded) are expected to increase by 1.4 percent in 2021 following a decline in 2020 of 2.3 percent. In 2022 further growth in business investments (vessels excluded) of 4.0 percent is expected.

Source: Statistics Denmark and Confederation of Danish Industry

Companies’ investments in equipment (vessels excluded) are expected to increase by 1.8 percent in 2021 and then by a further 4.7 percent in 2022. The prospect of renewed growth applies to investments in machinery and means of transportation both of which declined rather sharply in connection with the corona crisis. Companies’ investments in the digital transformation and in R&D were strengthened during the shutdowns in the spring of 2020, when digital forms of work and meetings became more common in large parts of the business sector, and demand for online sales channels has been increasing.

Source: Statistics Denmark and Confederation of Danish Industry

Businesses investments in buildings and constructions are expected to increase by 0.5 percent in 2021 and by 2.8 percent in 2022. Investments in the supply sector and the initiation of the construction of the Fehmarn connection are expected to make positive contributions to investments in 2021 and beyond. However, many companies will be reluctant to get involved in new construction projects as long as the corona crisis is still not over. However, in 2022 an increase in investments in the private sector is expected in order for the sector to catch up with the investment backlog from the previous two years.

Trading activities in the housing market have been at a record high in 2020. A trend that is also expected to continue in 2021. Homeowners are generally financially well established with large equities and there continues to be prospects of low interest rates which helps stimulate renovation activities.

BoligJobordningen (a regime that provides a tax deduction for certain types of expences regarding renovation, etc in a private home or holiday home) will give increased deduction allowances in 2021 which will lead to incresed private activity when it comes to renovations. A larger number of homeowners might be prone to advance planned investments in improvements regarding energy efficiency in order to take advantage of this scheme. The release of the otherwise “frozen” holiday pay and the lack of opportunities regarding travel abroad may also mean that part of the families’ normal budget for travel might be spent on housing improvements instead.

Investments in housing are also supported by the Agreement on Housing 2020, “Grøn Boligaftale” from May 2020. The renovation of public housing financed by Landsbyggefonden, The National Building Foundation, is also likely to affect the activity in 2020 and onwards.

On that basis, investments in housing are expected to increase by 4.9 percent overall in 2021 and by 3.1 percent in 2022.

High growth in public consumption in 2021

Although a relatively high level of real growth in public consumption in 2020 was planned from a political point of view, it does not appear to be the case that there was any significant growth last year. This must in particular be seen in the light of the fact, of public employees being sent home from work without the possibility of working from home. At the same time, it indicates that at the end of 2020, public procurement has not been as high as planned. Overall a small real growth in public consumption of 0.5 percent is estimated in 2020.

The Finance Act for 2021 points to a rather strong growth in public consumption. Together with a substantial procurement of materials aimed at combatting the corona epidemic, including purchase of vaccines it is suggestive of a higher level of public consumption. On the other hand, the fact of public employees having been sent home again in the first quarter might pull in the other direction. Overall, we estimate a growth of 1.7 percent in 2021. In 2022 our forecast is aligned with the expectations of the Ministry of Finance of a growth of minus 0.3 percent.

In the third quarter of 2020, public employment amounted to 833,000 individuals, which is equivalent to a small increase of approx. 1,800 individuals since the third quarter of 2019. However, behind the small increase, lies a decrease of 3,800 individuals from the third quarter of 2019 to the bottom in the second quarter of 2020, when the largest number of public employees was sent home. We expect public employment to pick up (when these large numbers of employees are no longer sent home) to a level of around 833,000 in 2021 and approximately 835,000 in 2022.

An.: Horizontal dashed lines denote annual averages

Source: Statistics Denmark and Confederation of Danish Industry

Public investments are estimated to have increased by 9.8

percent in 2020. The high growth must, among other things, be seen in the light of the fact that the municipalities and the regions have been given free rein to carry out construction projects in 2020. For 2021 and 2022 we estimate a growth of 4.8 percent and of 4.1 percent respectively.

Imports and balance of payments

When the economy is being shut down, we see some significant fluctuations in the import quotas as rent, insurance, etc still need to be paid, while a number of stores that to a great extent sell imported products are closed down.

Home market share is Danish production for the home market measured as total share of domestic demand.

Source: Statistics Denmark and Confederation of Danish Industry

However, with the reopening of the economy, there are signs that the domestic demand for imported goods will be swift to recover. This was a very clear trend in the autumn, prior to the renewed shutdowns. When society reopens some time during the spring, we therefore expect to see a recovery in imports.

Source: Statistics Denmark and Confederation of Danish Industry

Many countries, not least in Europe, have been hit much harder by the corona crisis than Denmark. As a result, exports have weakened more than imports, which leads to a rather significant reduction of the surplus in the balance of payments. However, we will still be looking at a significant surplus.

The labour market

Last year in February, the highest number ever of employees of 2,801.000 individuals was registered. Until the month of May, during the first shutdown, employment declined to 2,723.000 individuals.

Since then, employment has risen again to around 2,780.000 individuals in November, which is the most recent month that we have employment data for. The development in employment in December and in the first quarter of 2021 is estimated to be negatively affected by the extensive restrictions that are currently in effect.

The impact of the corona crisis on the labour market would have been much more significant had it not been for the wage compensation scheme, which included around 250,000 individuals – the scheme being the most applied in the spring of 2020.

During the current shutdown, the compensation schemes have been reintroduced fully, but as of yet there are no official figures on the amount of individuals, who are currently benefiting from the schemes. Figures from DI’s Virksomhedspanel (Business panel consisting of DI member companies) indicate that DI members’ use of wage compensation corresponds to about half of what was the situation in the early spring, when the scheme was used the most. Individuals on wage compensation are still considered employees, as they receive wages from their employer in the same way as always/normal.

Source: Statistics Denmark and Confederation of Danish Industry

The positive development in employment following the first reopening slowed down towards the end of 2020. In the first quarter of 2021, employment is expected to fall as a result of the second comprehensive shutdown. However, employment is then expected to increase during the rest of 2021 as society reopens. According to DI’s forecast, employment in 2021 will overall be 27,000 individuals higher than in 2020. During 2022, an employment increase of an additional 37,000 individuals is expected. Thus, during 2022, we will reach a level of employment that is even higher than before the corona crisis.

The corona crisis led to an increase in unemployment from 3.6 percent in February 2020 to 5.5 percent in May only to undergo another decline. With a steadily declining unemployment rate for seven months in a row, the unemployment rate was at 4.4 per cent in December. This is also the most recent month for which official unemployment figures are available. The development from 3.6 percent to 4.4 percent is equivalent to an increase of approximately 22,000 individuals (measured in full time equivalents). Despite falling unemployment, the current unemployment rate remains at a level, which prior to the corona crisis, had not been seen higher since 2015.

In addition to the official unemployment figures from Statistics Denmark, the Ministry of Employment has published daily figures for the number of unemployed registered throughout the crisis. These figures provide a much more current picture of the development in unemployment. As of 4 February 2021, unemployment was 40,000 individuals higher than on the same date last year.

DI expects that (gross) unemployment for 2021 will be 6,000 individuals below the level for 2020. In 2022, unemployment is expected to decline by a further 13,000 individuals.

Source: Statistics Denmark and Confederation of Danish Industry

An expansion of the workforce of 14,000 individuals is expected in 2021 and an additional expansion of the workforce of 22,000 individuals in 2022. The development is drawn in a positive direction due to later retirement as a result of increases in age regarding the early retirement scheme and old age pensions. Increased use of foreign labour is expected as well. The corona crisis provides a temporary increase in structural unemployment, while the agreement on the right to earlier retirement for some groups is expected to have a negative impact on the labour force from 2022 and onwards.

Approach

This economic forecast is based on published Danish and international statistics on national accounts, foreign trade, financial conditions, etc. We have applied the macroeconomic model MONA when carrying out this forecast. MONA has been developed by the Danish Central Bank. However, this forecast and its assessments, are solely the responsibility of the Confederation of Danish industries.

At the basis of this forecast lies the assumption of a gradual reopening during the spring of 2021. The retail industry and the liberal professions are expected to be among the first to reopen (their activities), however, with the continuation of requirements regarding distance, face masks and number of guests/clients allowed. Bars, nightclubs, big concerts and festivals are not likely to reopen until summer, when the whole population has been vaccinated. Delays in the delivery of vaccines, increase in infection rates and new infectious virus variants might delay the reopening.

The forecast has been finalized on Friday, February 5, 2021.

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