bodil nyboe andersen : recent economic developments in denmark speech by mrs bodil nyboe andersen, governor of the national bank of denmark, at the annual meeting of the association of danish mortgage banks, copenhagen, 28 april 2005. * * * the global economy is generally in a period of strong growth – at a rate of 5. 1 per cent in 2004. this may not completely match the picture painted by the media. the reason is that the figure conceals very strong variation between growth rates in various parts of the world. after a slowdown in 2001 and the beginning of 2002, the usa has achieved annual growth of 3 - 4 per cent. this growth has been driven particularly by strong private consumption, stimulated by tax reductions and very low interest rates. however, the downside in the usa has been a high and growing current - account deficit and a considerable government finance deficit. both of these deficits are often mentioned as the reason for the dollar's weakening against the euro. however, the usa has not faced difficulties in financing its current - account deficit and selling its government bonds. the demand for dollar assets is still high, especially from the asian countries. even though financing has not presented problems for the usa, this does not change the fact that the usa is becoming increasingly indebted to the rest of the world. this course does not appear sustainable, but it is naturally hard to predict how long it can continue. asia, apart from japan, has even higher annual growth rates, at 6 - 9 per cent. this reflects strong growth in exports to especially the usa, as well as growing domestic demand, including rising private consumption. this american - asian growth is driving the global economy. growth in the euro area, on the other hand, is currently very weak. once again, private consumption is part of the explanation. especially in germany, households are reluctant to increase their consumption demand. more fundamentally, germany has a clear need for structural reforms of its labour market and welfare system. the reforms are being addressed, but as long as the changes are still ongoing and even more are expected, general uncertainty will prevail. this contributes to the caution towards increasing private consumption. structural reforms are also needed elsewhere in the euro area. for the euro area overall, the weak development in consumption is a key factor behind the moderate growth. in denmark, however, we are good consumers! at least in the sense that we are currently spending a lot of money. private consumption

income. on the other hand, the groups with the highest incomes have a larger proportion of adjustable - rate loans. despite the variations in the debt composition of the different groups, the calculations show that the interest - rate exposure is more or less identical for all income groups. interest - rate exposure indicates the increase in the average interest burden on the group on an increase in the short - term interest rate. the latter is expressed as the interest rate on an adjustable - rate loan, irrespective of maturity. the analysis shows that if the short - term interest rate increases by 1 percentage point, homeowners'interest expenses will on average increase by approximately 1 per cent of their gross income. note that this is an average consideration. there is considerable variation in the figures both within the individual groups and with regard to other criteria, e. g. geographical location. for example, households in greater copenhagen and arhus have a higher mortgage debt than in the rest of the country. is this a large or small degree of vulnerability? this cannot be assessed from a single partial analysis of the debt composition. firstly, as mentioned, the figures are subject to considerable variation. even if the average homeowner does not face considerable difficulties in paying a higher interest rate, there is a significant group of households that are far more vulnerable because their interest - rate exposure is more than twice as high. secondly, vulnerability depends on whether the household has other loans at adjustable interest rates, whether it has a buffer to meet any higher interest expenses and whether it can easily reduce its consumption in the event of an interest - rate increase. unfortunately, the analysis does not include data that would shed light on this aspect. considerations of this nature should be central elements of the advice provided when loans are raised. analysing homeowners'vulnerability is naturally relevant because for many years development has been in one particular direction. house prices have risen and risen while the interest rate has been very low and it has become easier to borrow. the option of deferred - amortisation loans has been taken up more than most people had expected. therefore the question is now being raised of whether there is a property - market bubble, and if there is, when the bubble will burst. nobody can give a clear answer to that. bubbles are extremely interesting for economists to analyse, but unfortunately experience shows that bubbles can neither be predicted nor identified when they exist. bubbles are only apparent in hindsight. in mortgage - credit circles – and