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GDP contracted for the first time since Q2 2013
Danish GDP contracted by 0.1% q-o-q in the third quarter in line with our expectations but slightly below consensus. The contraction ended an eight quarter steak of continuous positive quarterly growth and the annual growth rate dropped from 1.7% to 0.95 – the lowest since Q4 2013. This was in line with the signals from business sentiment that for some time had hinted at a slowdown in economic activity, and has yet to indicate a strong pick-up in activity despite som improvements as of late.
The drop in GDP thus leaves us relatively comfortable with our below consensus estimate of 1.3% GDP growth for 2015. For now we do see the drop in GDP as a temporary blip and expect a return to modest positive growth in Q4, but the outlook is till muted by weak global demand. Also the underlying growth picture was weaker than the headline figure implies, as inventory build-up added 0.6%-points to overall growth. If this buildup of inventories was involuntary due to weaker demand than expected, this does not bode well for production going forward, and we could see a negative drag from inventories in quarters ahead.
Renewed drop in exports highlights external risks
The primary reason behind the negative GDP reading was a huge negative contribution from net trade. Thus, exports dropped significantly for the second quarter running, dragged down by exports of goods. This shows that the weakening of global demand has had an effect on demand for Danish goods, despite a favorable development in the trade weighted DKK. This also highlights that the euro area economy has yet to reach a cruising speed that is sufficient to make us believe in an export driven recovery. The drag from net trade was further enhanced by the small rise in imports. In Q2 overall grotwh was to some extent ‘saved’ by a surprise large decline in imports.
Private consumption disappointed – but due to low energy consumption
Depsite positive signals from both retail sales and debit card turnover, private consumption was flat over the quarter in Q3. The weak development was however to a large extent driven by weak energy consumption. Ex-energy, private consumption increased by 0.8% q-o-q which testifies of a more solid underlying demand following the soft spot hit in the prior quarter. Currently there are still tailwinds for private consumption from low inflation, an improved housing and labor market and low interest rates.
However, as our long standing view has been, we still see the high level of household debt acting as a constraint on a private consumption driven recovery. Finally, fixed gross investments eaked out a gain of 0.8% q-o-q driven by investments in machinery and intellectual rights. The former is probably driven by the need for replacement as business investments has been low for many years in the wake of the GFR. Housing and public investments continued to act as a drag on overall investment activity.
