Denmark CB Issues Warning as Economy Heats Up

The Danish government does not want to loosen fiscal policy next year and intends to hold its ground on that issue in budget negotiations with its powerful ally, the finance minister told Reuters.

His comments came after the central bank raised its economic growth forecast for Denmark but warned of risks of overheating if the government gives in to calls for more public spending.

 “We do not want a more expansionary fiscal policy. We’ve proposed a budget that is balanced with the business cycle and the labor supply,” Kristian Jensen said in a telephone interview.

The government has said its draft 2018 budget launched two weeks ago would slow economic growth slightly, but the Danish People’s Party, or DF, whose support it needs to pass laws, is pushing for increased welfare spending that could increase growth.

“We believe there is every reason to be cautious,” central bank governor Lars Rohde told Reuters. “We see no need for further stimulus, i.e. further easing of the fiscal policy. That would add more fuel to the fire”.

Rohde said that initiatives that could increase demand in the construction sector would be especially damaging as that sector would be the first to experience labor shortages and thus increased wages that would hurt competitiveness.

Wages in the construction sector rose 2.8% in the second quarter yr/yr, compared to 1.6% on average in the 13 countries Denmark does most of its trade with, according to figures from the Confederation of Danish Employers.

“If you want more private or public growth it would require that you’re ready to expand the labor supply. We intend to hold our negotiations partners to that,” Jensen said.

The government has proposed tax cuts it said would encourage people to work more, but the DF has opposed some of them saying it saw no reason to ease taxes for the wealthiest.

Jensen said that he believed it would be possible for the government to pass a budget that would take some of the energy out of the economy, and expand the workforce, in order to prolong the current upswing. “It’s too early to say if it will be of the magnitude the government wants. That’s what we’re negotiating,” he said.

The central bank now expects the Danish economy to grow 2.3% this year up from a forecast of 1.8% issued in March, and above the government’s 2% forecast published two weeks ago.

Denmark’s GDP rose 2.7% in the second quarter from the same time last year.