DENMARK OCTOBER ECONOMIC HIGHLIGHTS

UNCLAS SECTION 01 OF 02 COPENHAGEN 000507 SIPDIS STATE FOR EEB/IFD/OMA, EEB/TPP/ABT, EUR/NB TREASURY FOR DAVID WRIGHT COMMERCE FOR PAUL DACHER E.O. 12958: N/A TAGS: ECON EFIN EIND ETRD KTDB PGOV DA SUBJECT: DENMARK OCTOBER ECONOMIC HIGHLIGHTS COPENHAGEN 00000507 001.2 OF 002 Contents: -------------- ECON: Sober Outlook for the Danish Economy ECON: Health Costs to Increase Public Budget Pressures ECON: Danes are Saving, not Spending ECON: Denmark by the Numbers Sober Outlook for the Danish Economy -------------- ¶1. Danish Minister of Finance Claus Hjort Frederiksen announced in mid-October the revision of the Government's Economic Survey from August. The Government now expects a contraction in GDP for 2009 of 4% (versus the 3% contraction projected in August),and GDP growth in 2010 of 1% - 11/2% (the August projection was 1% growth for 2010). The Minister also revised the public deficit estimates. The Government now projects a DKK 90 billion deficit (USD 18 billion) for 2010, which represents about 5% of GDP and well over the 3% limit allowed in the EU Stability and Growth Pact. ¶2. The Danish National Economic Council released its biannual report on the Danish economy in late October. Though the Council believes the bottom of the crisis has been reached, it predicts a slow recovery requiring several years to regain pre-crisis production levels. The Council expects GDP to contract by 4.8% in 2009, and growth of 1.1% in 2010 followed by a slow, prolonged recovery. The report finds current government stimulus initiatives lacking and recommends additional spending of DKK 10 - 15 billion (USD 2 - 3 billion). Without further stimuli, the Council forecasts a doubling of unemployment before end-2010. The Council faulted the government for exercising insufficient prudence during good years with too much public spending and tax cuts, and for failing to carry out labor market reform, making the downturn worse. Health Costs to Increase Public Budget Pressures -------------- --- ¶3. Denmark spent DKK 99 billion (USD 19.8 billion) on health care in ¶2000. That figure increased to DKK 125 billion (USD 25 billion) in 2008 -- a 27% increase in eight years. The Danish Economic Council projects that healthcare costs will increase faster than previously expected and will lead to increased pressure on the public budget. According to the Council's estimates, Denmark will need an additional DKK 54 billion (USD 10.8 billion) annually to maintain the current level of public services, including healthcare, as compared to the Government's earlier estimate of DKK 14 billion (USD 2.8 billion) annually. The report comes on the heels of an early-October report by the Dream Group stating that government estimates of future annual social welfare costs (which includes healthcare, education, and other social support spending) undershot the actual costs, which they estimate will be as much as DKK 40 billion (USD 8 billion) annually. The Government had dismissed the Dream Group report as inaccurate, but has come under renewed pressure with the release of the Economic Council report. To offset the projected cost increases, the Economic Council recommended a health tax and the removal of tax deductibility of private health insurance premium payments. The Chairman of the Organization of Regional Governments is also suggesting a health tax to pay for the anticipated increased costs due to demographic trends and generally more expensive medicine. (NOTE: Regional government budgets are the mechanism through which much of Danish health care, particularly hospitals, is financed. END NOTE) Minister of Taxation Kristian Jensen is against increased taxes and feels that more focus on preventive care and improved efficiency in the health sector will stem the rising costs. Danes are Saving, not Spending -------------- ¶4. The Danish savings rate is currently at 14% of personal disposable income, the highest level since 1986. This is up sharply from the 2007 level of 9%. Danes have contracted their private spending more than any other OECD country over the past year, according to the Ministry of Finance. That this increase in saving has come after tax cuts, the distribution of frozen pension funds, and a relatively low unemployment rate has local commentators puzzled. Seasonally adjusted retail sales were down 1.7% from August to September, following a 1.3% drop the previous month. The usage of the Dankort, the primary method of point-of-sale payments in Denmark, fell by 1.6% from August to September, the second month in a row with a decrease in turnover from the card. Some local experts argue the increased saving stems from new tax rules that make retirement savings deposited before the end of the year more attractive, while others speculate that the massive drop in housing values are leading people to save and not spend. So far, the increased saving is bad news for the Government's plan to kick start the economy by stimulating private consumption. Denmark by Numbers COPENHAGEN 00000507 002.2 OF 002 -------------- ¶5. Denmark had the fifth highest annual increase in unemployment among the EU27 countries from 2008 Q2 to 2009 Q2. Denmark started at 3.1% unemployment in the second quarter of 2008, which almost doubled to 6.1% by the end of the same period in 2009, almost three times the EU average rate of increase. Official unemployment statistics (a more narrow measure than the standard OECD jobless measure) showed a renewed increase in the rate of unemployment. Extrapolating from the most recent OECD statistics, we estimate total Danish unemployment at 6.6%. Confidence indicators (which are an indicator of expectations for the coming three months in the industrial, service and construction sectors) still show a negative outlook. The composite industrial indicator (a scale from -100 to 100) was unchanged at -8, though expectations for future production increased while expectations for employment and sales prices fell. Expectations in construction continue a downward slide, though at a slower rate. They are still at a very low level with the composite construction indicator at -49, and expectations that new orders will be even a bit more negative in October than September. All branches of the construction sector expect negative developments in employment, turnover, and prices over the next three months. Expectations in the service sector, however, are turning up with the composite indicator at -8, up from -13 in September and -25 in March. With these confidence measures broadly indicating expectations of continued economic sluggishness, local commentators are speculating that the recession will continue through fourth quarter of 2009. FULTON