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Low-growth scenario until 1997 The economic recovery in Denmark, which started in the autumn of 1993, reached its peak in the summer of 1994 and has since lost steam. We expect the drop from high to low growth to remain at least until early 1997. Private consumption will be hurt by deteriorating consumer confidence and only a small rise in real disposable income. The poor export performance in 1995 will continue in 1996. In 1997, however, higher international economic growth and lower domestic wage increases may result in a considerable rise in exports. Inflation and budget deficit fulfil the convergence criteria Tougher conditions on the labour market and weak domestic demand will keep inflationary pressures in check. Inflation is expected to average only 2.1% in 1996 ­p; the same level as in 1995. This meets the Maastricht convergence criterion on inflation. The Danish public sector deficit is still among the lowest in the EU. In 1995, the deficit was only 1.5% of GDP and in 1996, the deficit is expected to rise to only 1.7% of GDP, thus comfortably exceeding the Maastricht convergence criterion of a deficit below 3% of GDP. The public sector deficit does not fulfil the convergence criterion of a debt ratio below 60% of GDP, though. The consolidated gross debt of the public sector seems set to be 68% of GDP in 1996. However, this does represent a sharp fall from the 80% figure in 1993. Denmark – the only solid alternative to Germany Although the Danish population rejected the single currency in May 1993, the lion’s share of the Danish parliament is in favour. Hence, fulfilment of the Maastricht criteria is a primary politico-economic goal. Considering the uncertainty surrounding the realisation of a single currency, coupled with the success of the Danish monetary and fiscal authorities in achieving these goals, we expect further narrowing of the yield spreads between Denmark and the other hard-core currencies (see table 1). Add to this a stable currency as well as converging yields and Danish bonds offer a significant pick-up in expected holding-period returns compared to other European hard-core currencies. After the convergence of the French and German yield curves, Denmark is the only solid alternative to Germany among the hard-core currencies. Gross domestic borrowing requirement significantly down The gross borrowing domestic requirement, reflecting the issue of Danish krone-denominated government bonds, is rapidly falling; from a high of Dkr138 billion in 1995 to Dkr103 billion in 1996, with a level of Dkr70 billion expected in 1997. The sharp reduction in gross supply lends support to our projections of lower interest rates. All securities issued by the Danish central bank are issued on a tap basis. Mortgage bonds an interesting alternative to government bonds Roughly 58% of the total outstanding volume in the Danish bond market is made up of callable mortgage bonds. Of this share, 22% is represented by the 10, 15, 20 and 30-year annuities with a coupon of 6%. In early 1996, foreign investors held 4% of the mortgage bonds corresponding to Dkr36 billion. As European yield curves continue to converge, investors are expected to look for other markets offering a yield pick-up, without compromising on the credit and liquidity risks. As Danish mortgage bonds meet this demand, we anticipate that the share of Danish mortgage bonds held by foreign investors will grow in the next 12 months. The yield pick-up on these bonds, illustrated in the graph, is significant considering the high liquidity, the low prepayment risk as well as the low credit risk. By Jørgen C Hansen and Frank Velling Table 1: Key economic indicators (change in %)
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