Country Report Denmark February 2009

Outlook for 2009-10

• The minority Liberal-Conservative government's main short-term policy priorities will be to ensure the stability of Denmark's financial institutions and to alleviate the effects of a sharp economic downturn.
• The downturn should make it easier to reach a political agreement on a tax reform, but the government is likely to fail to drive through reforms to the welfare system aimed at ensuring medium-term fiscal sustainability.
• The government has again raised the possibility of holding a referendum on whether to join the euro area. A vote in 2010 is possible, providing the government can persuade all the main pro-EU parties to back its campaign.
• Fiscal policy will be expansionary. Public investment is set to rise. Income tax for low- and middle-income earners was cut at the beginning of 2009. The government will seek to reduce the top rate of income tax in 2010.
• The Nationalbank (the central bank) will reduce interest rates during 2009, although it will maintain a positive differential with comparable euro area rates if this is necessary to protect the krone's peg to the euro.
• The Danish economy is heading for a severe contraction. Real GDP is forecast to shrink by 2.5% in 2009, with growth stagnant in 2010.

Monthly review

• In late January the Danish parliament held a public hearing on whether to adopt the euro. The central bank governor, Nils Bernstein, argued that Denmark would gain policy influence by joining the euro area.
• Following negotiations in parliament, the government and opposition parties have reached agreements on a second bank rescue package and a long-term framework for investments in transport infrastructure.
• The bank rescue package includes the offer of Dkr100bn (US$18bn) in state loans to recapitalise the financial system. In return, the government wants banks to maintain lending and has placed curbs on executive pay and dividends.
• A government commission charged with reforming the tax system delivered its final recommendations in early February, calling for Dkr35bn in income tax cuts in order to raise labour supply by the equivalent of 24,000 full-time jobs.
• Official data show a spike in the growth of credit to businesses in late 2008, but surveys suggest that Danish businesses are facing growing difficulties in securing new credit lines. Household credit growth continues to slow.
• Retail sales were exceptionally weak at the end of 2008. Consumer price inflation fell sharply in January 2009, to 1.8% year on year. Denmark recorded current-account surplus of Dkr12.1bn in the fourth quarter of 2008.

This report covers the following industry codes:
SIC Code: 15
NAICS Code: 23