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Country Commercial Guides FY 2000: Denmark Report prepared by U.S. Embassy Copenhagen, released July 1999 Note*

II. ECONOMIC TRANDS AND OUTLOOK

Major Trends and Outlook: Denmark's Social Democratic (SDP)-led minority government took office in 1993 and remained following the March 1998 elections. In its first four years, the Government succeeded in pursuing a carefully monitored stop-and-go economic and fiscal policy strategy, without jeopardizing medium-term economic growth, low inflation and the balance of payments. 1998 saw some overheating of the economy as unemployment dropped far below its structural level and the balance of payments surplus turned into a deficit, not least due to continued large increases in private consumption. Despite the Government's initial economic success, a number of problems have not been resolved: a large number of government transfer income earners paid not to work, a growing public sector, and a large government debt. In June 1998, the Government introduced an austerity package to dampen economic activity, restore the balance of payments, and discourage household borrowing. The new package is expected to reduce economic growth to below two percent in 1999.

The major elements of the package are a one-third reduction in important household tax deductions, and increases in energy taxes. The resulting increase in government revenues is partly offset by reducing income taxes for the lowest paid, including transfer income earners. The business sector pays its part of the bill through shorter credit periods for reimbursement to the government of value-added taxes collected. There is broad agreement that the new package is likely to meet its goals, and that the underlying strength of the economy will not suffer. Public budgets will remain in surplus, the deficit on the balance of payments will become reduced, and slower economic growth will not increase unemployment to any significant extent. The inflation rate will remain slightly above two percent, and the Danish Krone's value vis-à-vis the new EU Euro, will remain stable. Business investment is expected to stabilize or increase slightly. Growth in private consumption will be reduced to about two percent after annual increases in recent years of more than three percent. Public consumption growth is projected at around 1.5 percent annually and public investment is expected to stabilize after a drop of 5.2 percent in 1998. Imports of goods and services, with a growth averaging some six percent annually since 1994, is expected to stabilize at the 1998 level while growth in exports is expected to be about 1.5 percent. Consequently, the balance of payment deficit will be reduced to one percent of GDP compared with 1.4 percent in 1998.

Denmark's low inflation rates in recent years have averaged two percent, which has ensured wage earners real income gains of between one and two percent annually. Inflation is expected to remain at this level in both 1999 and 2000, providing for continuing real income increases. Hourly wage increases in 1999 and 2000 are projected at around between four and five percent each year.

Public and private sector employment rose by around two percent in 1998. The June 1998 austerity package aims at preventing a similar increase in 1999. The real growth projected for 1999 of less than two percent would correspond largely to projected productivity increases.

Official unemployment peaked in early 1994 at 12.6 percent of the labor force. By early 1999, it had fallen to six percent, or 167,000 people. Employment in the same period increased by a similar number, as new entrants to the labor force roughly equaled those who withdrew (taking advantage of government-funded leave programs and an early retirement program for long-term unemployed.) The present official unemployment level is below the estimated structural unemployment level, and labor bottlenecks have appeared, particularly in the building and construction sectors. Despite the strong underlying economy, more than 20 percent of the working age population lives on one or the other type of public transfer incomes. Although this number is falling, it remains a serious problem for the Danish economy and threatens the main pillars of the Danish welfare state (health, education and care for children and the elderly). The Government has succeeded in tightening availability to work rules, particularly for young people, and has made the government-funded parental leave program (introduced in 1994) much less attractive.

Almost two-thirds of Danish trade is with the EU. The United States is Denmark's largest non-European trading partner, accounting for close to five percent ($4.5 billion) of total trade.

Danish exports of manufactures in 1998 rose around two percent compared to foreign market growth of some eight percent. Denmark has lost more than 10 percent in market shares since the mid-1990's and this situation is expected to continue in 1999 and 2000, albeit with smaller losses, due to the recent depreciation of the Danish Krone. The loss of market shares is not unique to Denmark since it is mostly due to the continued international work sharing which means that low-cost, i.e., non-OECD, countries gain international market shares. The Danish Krone is linked closely to the Euro which means that, since the end of 1998, it has depreciated 12 percent in relation to the Dollar, between 8 and 10 percent in relation to the Pound, the Norwegian Krone and the Swedish Krone, and five percent to the Yen. These markets represent about 40 percent of Danish exports and with the consequent improvement in the Danish competitive position, prospects are good for increased exports to those countries.

Growth in imports for both 1999 and 2000 is expected to lag behind growth in exports, reflecting the effects of the June 1998 austerity package. Despite the increased value of the dollar, U.S. exporters are expected to lead in high technology, particularly information technology and aerospace.

The continuing, although smaller, Danish balance of payments deficit will keep the foreign debt at 24 percent of GDP by the end of 2000.

Business investment, corresponding to close to 15 percent of GDP, increased eight percent in 1998. Investment in construction and plants increased three percent in 1998, and is projected to fall slightly in both 1999 and 2000. Investment in equipment increased six percent in 1998 and will only increase slightly in 1999 and 2000. Public investment fell 5.2 percent in 1998 and is projected to stabilize in 1999 and 2000.

In 1998, the United States ranked seventh among Denmark's trading partners, and first among non-European sources, accounting for 4.8 percent of Danish trade in goods, 4.7 percent of exports and 5 percent of imports. Danish trade statistics measure the value of U.S. sales in 1998 as DKK 15.3 billion, an increase of 2.5 percent over 1997 (in dollar terms, U.S. sales increased one percent to $2.3 billion). Despite a recent change in Danish trade statistics from a "country of origin" basis to a "last country of departure" basis, Danish statistics differ significantly from U.S. trade statistics, which show U.S. exports to Denmark at only $1.9 billion in 1998. The difference may be due to Danish importers registering U.S. goods, which have been transshipped through other EU countries, as coming from the last port of call. Figures on Danish exports to the U.S. match U.S. import statistics. U.S. statistics show a U.S. trade deficit with Denmark of $502 million.

Principal Growth Sectors: Denmark is an industrialized "value-added" country, dependent on supplies of raw materials and semi-manufactures. Its imports are very diversified. Major U.S. product categories sold are machinery and capital equipment, of which more than one-third is electronic data processing equipment, parts and peripherals; aircraft; scientific and technical instruments; and military equipment. Other important U.S. sales include chemicals; fodders; raw tobacco; nuts and almonds; pharmaceuticals; and wood and plywood. U.S. automobiles and vans have been making some inroads to the Danish market, but most U.S.-brand cars are made in Europe. Computer software, management consulting services, tourism and shipping play important roles in Danish/U.S. services trade. U.S.-owned firms in Denmark have large shares of the Danish market for computer software services and management consulting services. Their annual sales exceed $1 billion. More than 100,000 Danes visit the United States each year. There is currently no U.S.-flag airline serving Denmark on a scheduled non-stop basis but SAS cooperates with United Airlines on trans-Atlantic flights in the so-called "Star Alliance". Denmark and the United States entered an "open skies" aviation agreement in early summer 1995.

The United States is by far the most important market for Danish shipowners, particularly those engaged in liner trade (container traffic) to and from the United States. Their U.S. engagement in 1998 produced more than 40 percent of Danish liner trade earnings, or close to one-third of total Danish freight earnings.

Government Role in the Economy: The public sector, with its more than 800,000 employees (28 percent of the labor force), plays a crucial role in the Danish economy. The Danish (Scandinavian) wealth sharing policy is based upon the public sector providing essentially all basic services: Health, social security, welfare and education. Created in the booming 1960s with full employment and far fewer women participating in the work force, the wealth sharing policy's validity and high cost are important issues on the political agenda. It remains politically difficult to introduce any major changes. Some vital government services are now suffering under the high cost of financing transfer income payments and servicing the large public debt, which together consume one-half of total public revenues (one-quarter of GDP). Hospitals and child day care centers have long waiting lists, which have led to use of private hospitals and private day care providers by wealthier Danes.

Privatization has been increasing in recent years. Many government-owned business entities have been sold (some only in part). These include: A life insurance company (100 percent), the national telecommunications company TeleDanmark (100 percent, U.S. company Ameritech holds a controlling interest), short-term export insurance (100 percent), Copenhagen Airports (49 percent), and the government's computer services company Datacentralen (75 percent sold to the U.S. Computer Sciences Corp.) The large Postal Service and Danish State Railroads companies have also been turned into private companies, but still with 100 percent government ownership. Some public services, including sanitation, cleaning and catering to public institutions, are increasingly being privatized.

The Danish tax burden is among the highest in the world - 51 percent of GDP in 1999. The economic upswing in recent years led to a small public budget surplus in 1997 of 0.1 percent of GDP which increased to 0.9 percent in 1998. The Government expects the surplus to increase to three percent of GDP in 1999. The Government's 1994 tax reform provided for gradually lowering the marginal income tax (state and local government taxes) through 1998. In 1999, marginal income taxes range from 40 percent (up to $21,500 in taxable income) to about 60 percent (taxable income exceeding some $37,000). In addition, and in order to partly offset income tax losses, the Government introduced a flat labor market contribution tax paid by employees which amounts to eight percent of gross income in 1999. Also, wage earners since 1998 have paid a 1.0 percent compulsory contribution to the labor market supplementary pension scheme. Income taxes for 1999 onwards were revised as part of the package of economic austerity measures introduced in June 1998. The revision will supposedly benefit low-income earners, chiefly welfare check recipients. The lowest income tax rate will be gradually reduced by a total of 2.5 percentage points, and the minimum income level will be gradually raised (by some 23 percent) through 2002. This revenue loss will be more than offset by reductions in the value of tax deductions, notably debt interest payments and payments into capital pension funds. Most energy taxes will be increased by 20 percent by 2002. The business sector also pays its part of the bill, through reduced credit periods for reimbursement of value added taxes.

The Government in 1994 introduced extensive labor market measures, including temporary government-funded leave for child care, educational and sabbatical purposes; job and education offers to the unemployed and welfare check earners; and a transitional early retirement scheme for long-term unemployed over 50 years old. As unemployment fell and labor bottlenecks started to develop, the Government since 1996 has reduced the benefits of the parental leave program and abolished the sabbatical leave and the transitional early retirement scheme. Nonetheless, some 220,000 persons were on early retirement or taking government-funded leave in 1998.

The public sector budget as a whole (including local government and public pension funds) was in surplus by DKK 10.3 billion in 1998 (0.9 percent of GDP). This surplus is expected to increase to 2.9 percent and 2.2 percent of GDP in 1999 and 2000, respectively.

Denmark has decided not to participate in the third phase of the EU's Economic and Monetary Union (EMU), which started January 1, 1999 and introduced the common EU currency (the Euro). However, Denmark adheres to the economic policies of the Union, including meeting the convergence criteria for such participation. The Krone is closely linked to the Euro with a very narrow band (2.25%) of Central Bank intervention rates. The government's monetary and exchange rate policies, built on the German model, aim at price stability and building international confidence a strong Danish economy. Since the early 1990's, the Government has pursued a carefully balanced monetary policy, which has preserved international confidence in the Danish economy and a strong Krone.

Despite Denmark's strong economy and stable exchange rate, Danish interest rates remain slightly higher than those of the Euro. Real interest rates are relatively high in Denmark, some four percent on mortgage and business credit, and six to nine percent on standard consumer credit.

Balance of Payments Situation: The Danish balance of payments (BOP) in 1998 shifted into a deficit after eight years of surpluses. The BOP surplus peaked in 1993 at DKK 30.4 billion Kroner, or 3.4 percent of GDP. Since then, the surplus has been gradually reduced and turned into a deficit of DKK 14.8 billion in 1998. For 1999, the Government projects a continued, but smaller, deficit of DKK 12.5 billion, assisted by the June 1998 austerity package.

Trade in goods (fob/fob basis) in 1998 produced a surplus of DKK 23.5 billion, down from DKK 35.5 billion in 1997. The former surplus on trade in services turned into a deficit in 1998 of DKK 3.4 billion. The travel account, traditionally in deficit, deteriorated by DKK 2.2 billion to a deficit of DKK 8.9 billion. Denmark is now a net contributor to the EU, by DKK 3.4 billion in 1998. Net interest payments, including dividends paid to foreign investors, amounted to DKK 28 billion, up DKK 2.2 billion from 1997. In addition, Denmark paid about DKK 11 billion (one percent of GNP) in assistance to less developed countries.

The BOP deficit in 1998 put a temporary stop to the Government's plan to reduce and eliminate by year 2005 Denmark's net foreign debt which stood at 24 percent of GDP at the end of 1998. The public sector's foreign debt (including foreign exchange reserves) was DKK 256 billion and included krone-denominated central government bonds held abroad worth close to DKK 270 billion. The total public debt, domestic and foreign, at the end of 1998 amounted to DKK 648 billion (56 percent of GDP). The private sector's foreign debt (including commercial banks) stood at DKK 24 billion at the end of 1998.