DENMARK JANUARY ECONOMIC HIGHLIGHTS

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SUBJECT: DENMARK JANUARY ECONOMIC HIGHLIGHTS

REF: Copenhagen 46

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Contents:
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ECON: Spending or Reform
ELAB: Labor Negotiations Slow Going
ECON: Denmark by the Numbers
EFIN: Danish National Bank Stress-Tests Banking Sector

Spending or Reform
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1. (SBU) The Chairman of the Economic Council Hans Joergen
Whitta-Jacobsen, who assumed his post on January 1, revised the
Council's recommendations on economic policy. The Council no longer
finds that the time is right for additional stimulus, but rather
believes that reforms of social welfare benefits, especially early
retirement and unemployment benefits, are much more pressing matters
to ensure economic stability in the long run. The economy may still
need further stimulus, but developments in 2010 should be watched
until the planning of the 2011 budget in August before any new
initiatives are prepared. The Minister of Finance declared that no
reform of the early retirement scheme is forthcoming, and given the
PM's recent statements indicating that fiscal belt tightening may be
in the offing (reftel),the Government seems more willing to cut
spending on the margins rather than instigate any major reform of
the benefit schemes or the labor market.

Labor Negotiations Slow Going
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2. (U) New labor market accords are being negotiated this winter and
spring, and from the outset the negotiations have been tough.
Employers have stated that the financial crisis leaves very little
room for wage increases and the diminished competitiveness of Danish
firms needs to be restored before pay increases can be justified. A
recent Green's Analysis poll showed that 57% of Danish CEOs expect a
zero real wage increase and 9% expect decreases. At the same time,
the Danish Confederation of Trade Unions (LO) stated expectations of
wage increases of 2.5% in 2010 and 3% in 2011, placing the
negotiators rather far apart. In addition, negotiators for labor
are demanding increased protection against wage pressures due to
competition from foreign unorganized labor. Labor has indicated
willingness to trade wage increases for social regulation like
maternity leave, flexible work hours, equal pay for men and women,
and minimum wage regulations during the negotiations and in the
past. A Gallup poll showed that only 31% think wages are the most
important issue.


3. (SBU) Many local observers are projecting that the negotiations
could lead to a general labor market conflict. The positions are
far apart, the labor unions have been out saying they have plenty of
funds for months of conflict, and a one-day work stoppage at
Carlsberg breweries is being interpreted as indicative of the
unions' willingness to use conflict to achieve their aims. On the
employer side, a poll from Berlingske Research showed 77% of CEOs
preferring a conflict to real wage increases. The last major labor
conflict was in 1998; historically, general labor market conflicts
have arisen every 12 years.

Denmark by the Numbers
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4. (SBU) The National Bank lowered its leading interest rate on
January 8 and again unexpectedly on January 15, leaving the rate at
1.05%, with the spread to the ECB rate at only 5 basis points. The
Harmonized Consumer Price Index (HCPI inflation) rose 1.1% in 2009
compared to an increase of 3.6% in 2008. Seasonally adjusted
production fell 1.8% from November to December 2010, continuing the
plummet that has caused production to fall 22.6% from December 2008
to December 2009. Danish goods trade experienced a severe blow in
2009 with imports down 21% or DKK 117 billion (USD 21.54 billion)
compared to 2008, and exports down a little less by DKK 95 billion
(USD 17.49 billion) or 16%. Goods exports increased by 0.7% in
December and goods imports increased 2.4% from November. The
composite consumer confidence indicator was at 1.1 in January, a
move toward the positive and the highest level since December 2007.
Business confidence indicators, on the other hand, remained negative
and basically unchanged in December, with the construction sector
still deeply depressed. Extrapolating from the most recent OECD
statistics, we estimate total seasonally adjusted Danish
unemployment by end of January at 7.7%.

Danish National Bank Stress-Tests Banking Sector
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5. (U) The National Bank finished stress-testing the fourteen
largest Danish banks in January (80% of the market) and found that
the Danish banking sector is generally adequately capitalized. The
Bank judges that the infusion of capital via banks availing of Bank
Package 2 assistance, stock issuance, and other means, will ensure
that the banks will survive 2010-2011, though some banks may need to
raise additional capital by the end of 2011. The Bank recommends no
new initiatives to help the sector, but predicts that the
consolidation in the banking sector will pick up through 2010 with a
substantial reduction in the number of banks on the Danish market.
Several CEOs in the Danish banking sector have recently made similar
projections. The National Bank's most likely scenario for 2010-2011
is total loan losses of 1.5% of all lending or DKK 50-70 billion
(USD 9.2 - 12.9 billion),almost three times the amount of losses in
2009 which was at 0.52% of all lending.

FULTON