DENMARK OCTOBER ECONOMIC HIGHLIGHTS

UNCLAS SECTION 01 OF 02 COPENHAGEN 000507

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TAGS: ECON EFIN EIND ETRD KTDB PGOV DA

SUBJECT: DENMARK OCTOBER ECONOMIC HIGHLIGHTS

COPENHAGEN 00000507 001.2 OF 002


Contents:
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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
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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
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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
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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

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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