Focus on the growth agenda

Today, the Ministry of Finance publishes the Economic Survey, August 2010, with the following assessment of the economic outlook until 2011:

• The Danish economy is growing moderately after the set-back following the international financial crisis. Over the last 4 quarters, GDP is estimated to have grown by up to 2 per cent.
  
  
• GDP is expected to grow moderately by 1.4 per cent in 2010 as a whole, and by 1.8 per cent next year. Growth is expected to become more self-sustained next year, with greater weight on domestic demand and exports.
  
  
• A number of important Danish export markets have experienced strong growth up until the summer, while the US-economy seems to have lost some steam, and uncertainties prevail regarding the strength of the global upswing. The necessary fiscal consolidation abroad may dampen GDP in Denmark by around ¼ per cent in 2011, but provides at the same time the basis for sustaining low interest rates and reduces the risks of financial turmoil.
  
  
• Developments in the labour market continued to surprise positively this spring. Unemployment is still expected to rise in the remainder of this year, but the estimate for registered unemployment has been adjusted downwards by around 10,000 persons both this year and next, to 121,000 and 125,000 persons (4.2 and 4.4 per cent of the labour force respectively). Including people in activation schemes, gross unemployment is expected at 171,000 and 177,000 persons in 2010 and 2011. Long-term unemployment has risen rapidly since 2008, but is still historically low.
  
  
• Public finances have weakened markedly due to the crisis and the very expansionary fiscal policy in 2009 and 2010 implemented in order to dampen the negative effects from the crisis. The fiscal deficit is estimated to DKK 80 bn. (€10.7 bn., or 4.6 per cent of GDP) in 2010 and DKK 79 bn. (€10.6 bn., and 4.4 per cent of GDP) in 2011. A considerable fiscal consolidation is required in order to reach the target of fiscal balance in 2015.
  
  
• In July, Denmark received a recommendation from the EU Council of Economic and Finance Ministers (ECOFIN) to strengthen public finances by 1½ per cent of GDP up to 2013 – starting in 2011. Denmark is required to take effective corrective actions within 6 months. This requirement is fulfilled by the Fiscal Consolidation Agreement.
  
  
• The Danish recommendation is among the mildest of the 24 recommendations that has been given to EU Member States in the EU procedure. In other countries, the required annual average consolidation is 3 times higher than in Denmark. All 24 countries are planning to adhere to their recommendations.

The Minister of Finance Claus Hjort Frederiksen states:

A key priority for the government is to maintain strong confidence in fiscal policy in Denmark and our fixed exchange rate policy. We are very committed to meet the recommendations that we have received from the EU Council of Economic and Finance Ministers – ECOFIN – and to our medium-term objective of structural balance in 2015.

The Fiscal Consolidation Agreement, decided in May, is designed to meet these objectives. The agreement creates a basis for keeping interest rates low – benefitting for example the housing market and employment. It also strengthens labour supply and increases the room for fiscal manoeuvre, if we need it later on. The agreement curbs the rise in public debt, so higher interest expenditures do not crowd out important public expenditures. And it ensures that we live up to our commitments in the EU.

With the prospects of the Danish recovery becoming more self-sustained, the time is right for planning to withdraw some of the massive stimulus to activity that has been provided by the fiscal easing this year and last year. GDP increased by some 2 per cent since summer 2009, which is a bit more than potential, and the labour market seems set to stabilise with unemployment – and long-term unemployment – still at quite low levels by historical standards.

The lagged effects of the stimulus and the reduction of interest rates still work on the economy in 2011, with economic policy altogether, including consolidation measures in 2011 and the drop in interest rates since 2008, providing an impulse to GDP growth of 1 percentage point next year, suggesting that consolidation can begin without jeopardising the recovery.