Statistics Denmark has just released the Q2 GDP data. We had expected a contraction in economic activity of 1.7% on Q1 09 (-5.3% on the same quarter of last year), but the data showed a significantly steeper decline in GDP of 2.6% from Q1 09 to Q2 09. GDP has thus dropped by 7.2% over the past year. This is a historically severe contraction.
Not least a steep decline in business investments was a drag on GDP in Q2 09, with gross fixed investments down by 10.3% from Q1 to Q2. Plus, exports dropped by 4.5% on the quarter. On the other hand, inventories – surprisingly – contributed 0.0% to GDP growth. Consumer spending flattened somewhat, down only 0.3% on the quarter.
Today’s data show that Denmark was hit far more seriously by the global economic and financial crisis than we had feared. So, we will no doubt have to downgrade our 2009 growth estimate when we publish our forecast update early next week. At first glance, GDP looks likely to contract by 4.5-5% this year. This even assumes that GDP does not contract any further in H2 09. However, we see good arguments to prevent this happening and hence a good chance that the decline in Danish GDP this year will be less than 5%. We expect the Danish economy to start growing as early as in Q3 09, as indicators of industrial production and exports are again pointing upwards and there are clear signs of recovery in the economies of Denmark’s trade partners.
So, although the Q2 GDP numbers came out significantly weaker than we had expected, we continue to believe that the Danish economy is on track for recovery in Q3. Indicators for Q3 are pointing slightly upwards, but this does not change the fact that 2009 will see the lowest GDP growth in Denmark since the 1930s. The crisis has been exceptionally severe.
Total business investment dropped by a whopping 16.3% from Q2 08 to Q2 09 and the 13.6% decline in exports during the same period was even worse than feared. The particularly large blow to exports and investments illustrate that the crisis originated outside Denmark. Exports were hit by the entire world switching to reverse gear as the crisis struck, while investments were hit by both the contraction in production and by the crisis originally being centred in the financial industry. Businesses had difficulties raising finance for some time and investment options generally turned less profitable. Luckily, we have seen considerable improvement in the financial industry since Q2 – and the world economy is also recovering.
It is hard to find any bright spots in today's GDP numbers – except perhaps for the decline in jobs of only 13,700. The reason for the relatively modest fall in employment was an increase in public-sector employment of 6,000 and a smaller decline in construction employment than feared. Also, employment in rental and real estate services did not fall any further in Q2 than it had done already.
