Friday, 23 September 2011

Denmark Economy

Denmark's industrialized market economy depends on imported raw materials and foreign trade. Within the European Union, Denmark advocates a liberal trade policy. Its standard of living is among the highest in the world. In 2011, Denmark is expected to devote about 0.84% of gross national income (GNI) to foreign aid to less developed countries, including for peace and stability purposes, refugee pre-asylum costs, and environmental purposes in central and eastern Europe and developing countries, making Denmark one of the few countries that are contributing more than the UN goal of 0.7 % of GNI to aid.

Denmark is a net exporter of food and energy. Its principal exports are machinery, instruments, and food products. The United States is Denmark's largest non-European trading partner, accounting for 5.0% of total Danish goods trade in 2010. Aircraft, computers, machinery, and instruments are among the major U.S. exports to Denmark. Among major Danish exports to the United States are industrial machinery, chemical products, furniture, pharmaceuticals, canned ham and pork, windmills, and plastic toy blocks (Lego). In addition, Denmark has a significant services trade with the U.S., a major share of it stemming from Danish-controlled ships engaged in container traffic to and from the United States (notably by Maersk-Line). There were 436 U.S.-owned companies operating in Denmark in 2008, not including financial service companies.

Like the rest of the world, Denmark was affected by the 2008-2009 global economic crisis. Most local observers agree that Denmark is on the path to a slow recovery, with economic growth from the third quarter of 2009 onward. Gross unemployment averaged 6.0% in 2010, up from 2.7% in 2008; the average length of the unemployment period has increased. Unemployment is not anticipated to decrease before the end of 2011. Private consumption has contracted significantly and is still below pre-crisis levels. The same goes for industrial production, which has been pushed to the lowest level in over a decade. Exports fell dramatically--about 20%--also due to the devaluation of trading partners’ currencies, especially those of Sweden, Norway, and the U.K. In 2010 exports regained some of the loss with 10% growth. The gross domestic product contracted by 4.9% in 2009, but is estimated to have grown by 2% in 2010 after beginning to rebound in the third quarter of 2009. The government estimates GDP growth of 1.7% in 2011 and 1.5% in 2012. In 2008, the budget surplus was $11.58 billion (3.4% of GDP), which changed to a deficit of $8.5 billion in 2009 (2.7% of GDP). The deficit was estimated at $11.11 billion in 2010 and is forecast to be $14.93 billion in 2011 (3.6% and 4.7% of GDP, respectively), exceeding the 3% limit set by the Economic and Monetary Union of the EU (EMU). The government has proposed plans for fiscal consolidation to bring the deficit below 3% of GDP by 2013; as of January 2011, the EU Commission said that Denmark’s responses to remedy the excessive deficits had been adequate. Public debt reached 41.4% of GDP in 2009 but remains well within the 60% limit set by the EMU. It was estimated to increase to 43.3% in 2010 and is forecast to be 43.8% in 2011.

In addition to the global crisis, Denmark has an underlying growth problem, and is projected to have one of the lowest productivity growth rates among Organization for Economic Cooperation and Development (OECD) countries in the decade to come; it dropped from sixth to twelfth place among the richest OECD nations from 1997 to 2007. Denmark is facing demographic challenges that could lead to labor supply shortages as early as 2012 according to some estimates. Denmark has maintained a stable currency policy since the early 1980s, with the krone formerly linked to the Deutschmark and since January 1, 1999, to the euro. The Greek financial crisis has affected Denmark to some extent--as the euro falls in value, the krone also falls, making Danish exports more competitive. Denmark’s contribution to the EU financial support package to Greece was 1.2 billion euro. As of 2010, Denmark no longer meets the economic convergence criteria for participating in the EMU due to its public deficit rising above the allowed 3% of GDP. Prior to the Greek financial crisis, opinion polls showed a majority in favor of the EMU, though polling at the end of 2010 showed strong support for a "no" vote in the event of a referendum on joining the eurozone. No referendum on the EMU/euro is expected before a general election that must be held in 2011, nor until polling shows a significant majority for a "yes" vote.

Danes are generally proud of their welfare safety net, which ensures that all Danes receive basic health care and need not fear real poverty. However, there is a growing political debate about how government policy should be reformed in order to preserve and strengthen the system. The portion of working-age Danes (16 to 66-year-olds) living mostly on government transfer payments amounts to 22.6% (2009). The heavy load of government transfer payments burdens other parts of the system. Health care, other than for acute problems, and care for the elderly and children have suffered, while taxes remain among the highest in the world. About one-third of the labor force is employed in the public sector.

On June 21, 2009, Greenland assumed increased autonomy under a Self Rule Act, transitioning away from “home rule”, which had been in effect since 1979. Under self rule, the Greenlandic government (Naalakkersuisut) and the Danish Government are recognized as equal partners and Kalaallisut, the Inuit dialect, becomes the official language. Greenland will gradually take responsibility for additional government functions, such as prisons, criminal justice, courts of law, family law, passports, and mineral resources. The Danish Government freezes its annual block grant at the 2007 level of 3.2 billion kroner ($570 million, 2010 exchange rate). That grant will be adjusted for Danish inflation, though not the often higher Greenlandic inflation, meaning the value in real terms is expected to shrink in coming years. However, Greenland gains rights to its mineral, oil, and natural gas resources: the first 75 million kroner ($13.3 million) from mineral/oil/gas revenues would go to Greenland, with further revenues split equally between the two governments, and with Denmark’s share being subtracted from the annual block grant. Once the block grant is eliminated, any additional revenue would be subject to renegotiation between the Danish and Greenlandic governments.

The public sector in Greenland, including publicly owned enterprises and the municipalities, plays the dominant role in the economy and employs roughly 50% of the workforce. A large part of government revenues still comes from the Danish Government block grant, 46% in 2009. The block grant remains an important supplement to GDP. About one-third of government revenue came from taxes in 2009.

According to the World Bank, Greenland’s GDP was $1.8 billion in 2008, and GNI per capita was $32,960. The global economic slowdown affected Greenland as well; a contraction of 2% of GDP was expected for 2009, although statistics for that period have not yet been released. The surpluses in the public budget turned to a deficit of $30 million in 2009, and unemployment is on the rise after an extended period from 2003 onward with lower unemployment. The average unemployment rate for 2008 was 5.5%, 7.1% in 2009, and averaged 8.3% for the first three quarters of 2010. Structural reforms are still needed in order to create a broader business base and economic growth through more efficient use of existing resources in both the public and the private sectors.

Due to its continued dependence on exports of fish (mainly shrimp), which make up 85% of goods exports, Greenland’s economy remains very sensitive to foreign developments. Greenland has registered a foreign trade deficit since the closure of the last remaining lead and zinc mine in 1989. The trade deficit reached $325 million, or 18% of GDP, in 2009. International interest in Greenland’s mineral wealth is increasing. International consortia are increasingly active in exploring for hydrocarbon resources off Greenland’s western coast; in November 2010, seven exclusive licenses for exploration and exploitation of oil and gas were awarded. There are international studies indicating the potential of oil and gas fields in northern and northeastern Greenland. The U.S. Geological Survey estimates that up to 17 billion barrels of oil and gas are present in the area between Canada and Northwest Greenland. Cairn Energy carried out three exploration drillings in Greenland in 2010, the first exploration drilling in Greenland in 10 years, and discovered gas and oil-bearing sands in one of the drillings. The U.S. aluminum producer Alcoa in May 2007 concluded a memorandum of understanding with the Greenland Home Rule Government to build an aluminum smelter and associated power generation facility in Greenland to take advantage of abundant hydropower potential, although progress on that project has been delayed. It is estimated that, upon completion, the Alcoa investment would be worth approximately $2.5 billion. Tourism also offers another avenue of economic growth for Greenland, with increasing numbers of cruise lines now operating in Greenland’s western and southern waters during the peak summer tourism season.

Faroe Islands In early 2008 signs of an impending slowdown in the Faroese economy became apparent. The main difficulty lay with the fishing industry coming under pressure from smaller catches combined with historically high oil prices. Reduced catches, especially of cod and haddock, strained the Faroese economy in 2008-2009. GDP grew 24% (in current prices) between 2004 and 2008 but then contracted by 0.8% in 2008 and by 4.2% in 2009. According to the Governmental Bank of the Faroes (Landsbanki Foroya), indications were that in 2010 the Faroese economy was about to change from a downturn to growth, and nominal GDP was projected to grow by 2.9%. The bank predicts that there are prospects for nominal economic growth in 2011 (about 5%) and some years ahead. The main drivers of growth are considerably higher output levels in the fisheries sector in 2010 and expectations for increased private spending. The public sector is expected to reduce its deficit in 2011, and the Governmental Bank expects that the public budget will be brought into balance over the course of 5 years.

The temporary slowdown in the Faroese economy followed a strong performance since the mid-1990s, with annual growth rates averaging close to 6%, mostly as a result of increased fish landings and salmon farming and high and stable export prices. Positive economic development had helped the Faroese Home Rule Government produce increasing budget surpluses that in turn helped to reduce the large public debt, most of it to Denmark. Most of the Faroese who emigrated in the early 1990s (some 10% of the population) due to an economic recession have returned. Unemployment had been low since 2003 and practically non-existent at its lowest level of 1.2% in April 2008 but has since increased sharply, with average unemployment of 5.7% in 2010 and rising. The Faroese economy is very vulnerable, due to its dependence on fishing and salmon farming and fluctuating energy prices.

The currency of the Faroe Islands is the Foroyska kronan. However, it is not an independent currency. Faroese bank notes are Danish bank notes that feature Faroese motifs. There are no Faroese coins.

Initial discoveries of oil in the Faroese area give hope for eventual oil production, which may lay the basis for a more diversified economy and thus less dependence on Denmark and Danish economic assistance. Aided by an annual subsidy from Denmark corresponding to about 6% of Faroese GDP, the Faroese have a standard of living comparable to that of the Danes and other Scandinavians.

Politically, the present Faroese Home Rule Government has initiated a process toward greater independence from Denmark, if not complete secession from the realm. In that respect, agreement on how to phase out the Danish subsidy plays a crucial role.

GDP (2009): $297.8 billion (current prices and exchange rates; source: Government of Denmark).

Annual growth rate (real terms, 2009): -4.9%.
Per capita GDP (2009): $53,822 (current prices and exchange rates).

Agriculture and fisheries (2.3% of GDP, 2009): Products--meat, milk, grains, seeds, hides, fur skin, fish and shellfish.

Industry (19.3% of GDP, 2009): Types--industrial and construction equipment, food processing, electronics, chemicals, pharmaceuticals, furniture, textiles, windmills, and ships.

Natural resources: North Sea--oil and gas, fish. Greenland--fish and shrimp, potential for hydrocarbons and minerals, including zinc, lead, molybdenum, uranium, gold, platinum. The Faroe Islands--fish, potential for hydrocarbons.

Trade (2010, goods): Exports--$96.281 billion: industrial production/manufactured goods 73.3% (of which machinery and instruments were 21.4%, and fuels, chemicals, etc. 26%); agricultural products and others for consumption 18.7% (in 2009 meat and meat products were 5.5% of total export; fish and fish products 2.9%). Imports--$83.967 billion: raw materials and semi-manufactures 37.4%; consumer goods 17.9%; capital equipment 21.7%; transport equipment 9.7%; fuels 8.0%. Major trade partners, exports--Germany 16.8%, Sweden 13.3%, U.K. 7.8%, U.S. 6.6%, Norway 6.3%, Holland 4.4%. Major trade partners, imports--Germany 20.8%, Sweden 13.3%, Holland 7.1%, U.K. 6.0%, China 7.6%, Norway 3.9%, U.S. 3.2%.

Official exchange rate (2010 average): 5.62567 kroner=U.S. $1.

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