Negative Rate Surprises Abound as Danish Investments Stall

Updated on
  • Danish government slashes economic forecasts on oil, exports
  • Savings ratio rises, investments fall, despite 4 yrs of NIRP

Almost four years of negative interest rates have unsettled corporate executives in Denmark, where investment is slowing despite record-low borrowing costs.

Denmark cut its forecast for economic growth this year as a combination of lower oil prices, weak exports and delayed corporate investment forced the government to acknowledge its previous estimates were too optimistic.

Gross domestic product will grow 1.1 percent in 2016, compared with a December forecast for 1.9 percent, according to a Finance Ministry document prepared for the European Commission and seen by Bloomberg on Tuesday.

Danish benchmark deposit rate is minus 0.65%.

Denmark estimates investment in the private sector will be equivalent to 16.1 percent of GDP this year, compared with 18.1 percent between 1990 and 2012. Meanwhile, the savings rate in the private sector will reach 26 percent of GDP this year, versus 21.3 percent in the roughly two decades until Danish rates went negative, Finance Ministry estimates show.

“What recent surveys show is that the actual rate level isn’t all that determines whether companies want to invest, they also need to have clarity on the economic outlook,” said Jes Asmussen, chief economist at Handelsbanken in Copenhagen.

“This is the government conceding the economy is in the middle of a low-growth crisis and it’s very hard to see which factors might get the economy out of that crisis,” he said. “Obviously, there’s a potential investments could start to rise but that requires the economic outlook to improve considerably.”

Denmark’s benchmark deposit rate has been mostly negative since mid-2012. Most economists don’t see rates going positive until 2018 at the earliest. Though the policy is designed to defend the krone’s peg to the euro, its effect on the broader economy offers lessons as more central banks embark on negative interest rate policies.

Denmark estimates GDP growth of 1.7 percent in 2017. The government’s budget deficit will be 2.3 percent of GDP this year, better than a previous estimate for 2.8 percent, it said. The gap will narrow to 1.9 percent in 2017, it said.

The government also cut its outlook for bond yields and sees the benchmark 10-year rate 25 basis points lower both in 2016 and next year, when Denmark expects to be able to borrow for a decade at 1.1 percent. Its 10-year bond yield traded at about 0.52 percent as of 10:35 a.m. in Copenhagen.

(Adds bond yield forecasts at end.)
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