Economic Survey, August 2009

The Ministry of Finance has published the August 2009 edition of its Economic Survey. The main points in the survey are:

• In the aftermath of the global financial crisis last autumn production and demand in Denmark and in other countries have fallen further in the first half of 2009. There are now, however, an increasing number of more certain signs that the fall in activity is slowing considerably, helped by the significant fiscal and monetary policy initiatives implemented in many parts of the world. Conditions in the financial markets have generally improved, and confidence has strengthened.
   
• Economic policy in Denmark is more expansionary than in most other countries, and the initiatives taken will sustain demand with increasing strength in the rest of this year and in 2010. That will – together with the large fall in interest rates and a starting recovery abroad – lead to increased activity over the second half of this year. In 2009 GDP is expected to fall by 3 per cent (annual average) due to the fall in production and demand that has already taken place. GDP is expected to grow by 1 per cent in 2010.
   
• Employment is expected to fall both this year and next, mainly as a result of the large fall in production since last autumn. Unemployment is expected to rise with diminishing pace and reach a level of 150,000 (full-time) persons on average in 2010. The level corresponds to around 5¼ per cent of the labour force – roughly 2 percentage points lower than the average unemployment rate over the last three decades.
  
  
• Next year the fiscal deficit is expected to exceed the EU reference value of 3 per cent of GDP. The surplus in 2008 of 3.4 pct. of GDP is thus expected to turn into a deficit of 2.0 per cent in 2009 and 4.9 per cent in 2010. This raises considerable requirements regarding consolidation of public finances in order to reach the central objective in the 2015-plan of at least balance in public finances in 2015.

Minister of Finance, Mr. Claus Hjort Frederiksen, states:

The international financial crisis has turned the economic situation in Denmark upside down. Only one year ago there were severe pressures in the labour market, with very high wage growth and unemployment rates reaching historical lows, and a sizable fiscal surplus. We are now facing higher unemployment and considerable fiscal deficits.
 
The large turnaround in public finances partly reflects the major efforts by the government to dampen the negative effects on activity and employment of the crisis. We have been able to do this, since public debt has been reduced significantly in recent years and turning net public debt in to a net asset position. The many fiscal initiatives will work with increasing strength through the rest of this year and in 2010. Together with the signs of stabilisation of the world economy that we have seen in the course of the summer, this gives reason to expect growth in activity in the last part of 2009 and in 2010.
 
Over the autumn, the government will size up the effects of the expansionary economic policy. It is hard to predict the exact timing and strength of the coming upswing. It is thus not the time for new, costly initiatives, leading to even bigger deficits and debt, and increasing the risk of higher interest rates, which in turn may weaken the housing market and employment. The key priority is to support demand and employment in the short run, and to make sure, that public deficits are temporary and in line with medium term fiscal targets as set out in the 2015-plan.

Download Economic Survey - the outlook, August 2009