III. ECONOMIC TRENDS AND OUTLOOK Major Trends and Outlook: Following years of slow economic growth, the Social-Democratic-led (SDP) majority government, which took office in January 1993, significantly relaxed the former right-of-center government's tight fiscal policy. Effective at the beginning of 1994, income taxes were reduced, and government-funded leave programs were introduced. Most importantly, interest rates fell in the second half of 1993. The fall reflected Denmark's low inflation rate and a generally strong economic performance. As a result, the Danish economy started to pick-up in the second half of 1993. This development accelerated in early 1994 and is expected to lead to a four percent growth in Gross Domestic Product (GDP) in 1994, driven mostly by domestic factors, notably private consumption. The Government projects continued GDP growth of 3.4 percent in 1995, lead by continued strong growth in private consumption and exports. Until recently tight fiscal policies dampened domestic demand, particularly for consumer durables, and investment. Interest rate declines in the fall of 1993 benefited both businesses and consumers. Declining interest rates induced many homeowners to refinance high-interest mortgages at lower interest rates. Refinancing accelerated in early 1994, but, perhaps temporarily only, came to a halt in April as interest rates rose. As refinancing reduces debt service costs, and often frees capital to households, it tends to increase consumer spending. The resultant cash flow to consumers will be the biggest contributor to private consumption growth in 1994. Much of the increase in consumer spending is going to relieve pent up demand for imported consumer durables, such as automobiles. Auto sales increased 70 percent in the first quarter of 1994. In 1994, private consumption is expected to increase by nearly five percent. In 1993, Denmark had a record-low inflation of 1.3 percent (measured on consumer prices), one of the lowest rates in Europe. The low rate was triggered by a drop in import prices, low wage increases, and high productivity gains. As a result, wage earners saw a real income gain of more than one percent. In 1994, inflation is expected to increase slightly to around two percent, due to new environmental taxes designed partially to offset lost income tax revenues. Despite new excise taxes, the fiscal easing, including that resulting from debt conversion, will mean a two to four percent real increase in wage earners' disposable income after taxes. The household savings rate (savings as a percentage of after-tax income), which was negative in the mid-1980s, increased to six percent in 1993. The Government expects a drop in the savings rate to 5.4 percent in 1994 and to three percent in 1995, the latter being a prerogative for its projections of continued high private consumption growth. Manufacturing industry sales dropped almost three percent (in real terms) in 1993, reflecting slack foreign and domestic markets. Industry experienced a more than six percent reduction in hours worked (about 17,000 jobs), which was offset by productivity increases of three percent. Due to productivity gains and small wage and indirect cost increases, unit labor costs were steady in 1993. However, on a foreign trade weighted basis, wage competitiveness deteriorated by close to two percent, which was one of the reasons for slack export growth. In 1994, due to continued small wage increases and stable exchange rates, competitiveness is expected to improve. This should help Danish industry increase its market shares at home and abroad. Goods and services exports fell by less than two percent in 1993 while imports declined more than four percent. In 1994, exports are expected to increase by close to five percent and imports by close to 10 percent. Thus, there will be a reduced trade surplus in 1994 compared with 1993, which will be offset in part by reduced foreign debt service costs. Denmark will continue to run a balance-of-payments surplus sufficient to permit repayment of foreign debt down to almost one-quarter of GDP at the end of 1994. Total fixed investment, corresponding to about 15 percent of GDP, fell by two percent in 1993 following a drop of about 15 percent over the preceding three years. A 10 percent increase in investment by the public sector was more or less offset by a four percent decline in business investment, which accounts for about 40 percent of the total. In 1994, the Government projects total investment to increase by close to 10 percent, concentrated on investment in material and equipment. Housing investment, also an important "private consumption" indicator, has fallen 30 percent since 1989, but is expected to turn around in 1994 and increase by seven percent. Principal Growth Sectors: In 1993, the United States ranked seventh among Denmark's suppliers and first among non-European sources. Except for erratic year-to-year fluctuations in U.S. sales of aircraft and coal, U.S. exports to Denmark have been stable in recent years. Due to sharply reduced U.S. aircraft and coal sales to Denmark in 1993, imports of U.S.-origin products dropped 15 percent to DKK 9.2 billion. As Danish exports to the United States increased 18 percent in 1993 to DKK 12.3 billion, half of the increase due to ship exports, U.S. trade with Denmark shifted from a balance in 1992 to a U.S. deficit of more than DKK three billion in 1993. As 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, including computers; medical and surgical instruments; and military equipment. Other important U.S. sales include aircraft, tobacco, plastic products, printed material, and pharmaceuticals. U.S.-produced consumer durables, including automobiles, never played an important role in U.S. exports to Denmark, but U.S. brand goods produced elsewhere are widely recognized. In 1994, economic growth, including new business investment, should assist an increase in U.S. sales, but in order to significantly reduce the U.S. deficit, U.S. coal and aircraft sales must, in part at least, be resumed. Shipping, tourism, computer software and management consulting services play important roles in Danish/U.S. services trade. Danish vessels, engaged mostly in liner trade between third countries and the United States, produced more than one- quarter of the DKK 31 billion in Danish gross shipping earnings in 1993. About 100,000 Danes annually visit the United States. The bulk of those visitors are carried by Scandinavian Airlines (SAS) and other European airlines. As of May, 1994, Delta Airlines is the only U.S.-flag carrier serving Denmark. U.S.-owned firms in Denmark have large shares of the Danish markets for computer software services and management consulting services, with annual sales probably exceeding DKK 6 billion. Government Role in the Economy: The SDP-led Government's major goal is combatting unemployment while maintaining Denmark's low inflation rate. The Government's program adopted in June 1993 named "New Course towards Better Times" introduced, beginning in 1994, fiscal stimulus worth about DKK 12 billion, or about 1.5 percent of GDP, including a tax reform, as well as labor market, growth, and public expenditure measures. The Government's tax reform includes gradually lowering marginal income tax rates from 51.5-68 percent in 1993 to 37.5-58 percent in 1998. To partly offset revenue losses, the Government adopted a labor market contribution tax paid by employees of five percent of gross income. This tax will increase to eight percent by 1998. Employers will also pay a new labor market tax of 0.3 percent of wages starting in 1997, rising to 0.6 percent in 1998. Additionally, several new "environmental" taxes will also offset income tax revenue losses. The labor market measures include Government-funded leave for child care, educational, and sabbatical purposes; job and education offers to the unemployed and social benefit recipients; and the establishment of 20,000 new education places. The central government's budget deficit rose DKK 10 billion in 1993 to almost DKK 50 billion, 5.5 percent of GDP, and is expected to remain at this level in both 1994 and 1995. Increasing unemployment costs, of which two-thirds were financed from general revenues, contributed to the increase in the 1993 deficit. The 1994 and 1995 deficit projections indicate increasing expenditures only offset by revenues from taxes on consumer spending. The total public sector deficit, including local governments and public pension funds, is stable at about DKK 40 billion, or 4.6 percent of GDP. Following the fiscal easing in 1994, the Government expects some tightening in 1995 to reduce the public sector deficit and thus the share of GDP of public sector debt. This policy is part of the Danish economic convergence program submitted to the EU in early 1994. Even though Denmark will not participate in the third phase of the EU's Economic and Monetary Union, it will adhere to the economic policies of the Union. The Government's monetary and exchange rate policy aims at price stability and building international confidence in a strong Danish economy. Since the currency crisis in July 1993, which led to a system of de facto floating exchange rates for most EU currencies, the Government has pursued a successful and carefully balanced monetary policy, including several interest rate reductions, to help restore international confidence in the economy and strengthen the krone. During the crisis, the krone dropped six percent against the German mark and, on a trade-weighted basis, about five percent. By April 1994, the krone was back at its pre-crisis level in relation to the other EU currencies. Over the year ending April 30, 1994, the krone dropped eight percent in relation to the dollar. The Government's firm krone policy, which in practice means a stable Krone/DM exchange rate, requires that Denmark maintain interest rates close to those in Germany despite Denmark's lower inflation rate. Responding to the series of small discount rate reductions since the 1993 currency crisis, market interest rates reached a low in January, when the interest rate on the leading mortgage bond (six percent/30-year bond) dropped below seven percent. Despite continued discount rate reductions to the lowest level in 34 years, the large amount of krone-denominated bonds held abroad combined with foreign portfolio investors' fear of increasing Danish inflation due to the economic upswing, has meant that interest rates are temporarily outside Danish "control." As a result, interest rates increased by more than 1.5 percentage points since January. Thus, viewed against the low inflation rate, real interest rates in Denmark are high: in May 1994 about 11 percent on consumer bank credits, seven percent on business credits, and about six percent on mortgage debt. The Government projects that interest rates will again decline to the January level, as foreign confidence in continued low Danish inflation is restored. Such a reduction, by the way, is needed to sustain the Government's economic projections, particularly regarding private consumption and investment growth, and a reduced savings rate. Balance of Payments Situation: Every year since 1990 the Danish BOP surplus has increased, after 27 straight years of deficits. The BOP surplus in 1993 came to DKK 35 billion, as a result of a surplus of about DKK 67 billion on the goods and services balance offset by about DKK 32 billion in interest and development assistance payments. For 1994, the BOP surplus is projected to drop to DKK 28 billion, as imports are expected to increase faster than exports. The BOP surplus has allowed Denmark to reduce its large foreign debt, which peaked in 1988 at 40 percent of GDP, to 31 percent of GDP at the end of 1993. At the end of 1994, the debt could be as low as 26 percent of GDP. The Danish government is a net external debtor, while the private sector, including banks, is a net creditor. At the end of 1993, the governmental foreign debt was about DKK 400 billion, of which krone-denominated government bonds accounted for 60 percent. Following five years with an average annual real increase in commodity exports of more than six percent and close to three percent in commodity imports, both dropped in 1993, exports by less than one percent and imports by close to three percent. The fall in exports was mostly due to the international recession, but also to reduced Danish competitiveness following the devaluations in late 1992 of the Swedish krone and the British pound, the currencies of two of Denmark's largest export markets. With the recession coming to an end, the Government expects export growth to return to previous years' levels. On the import side, the drop mostly reflects the slack Danish market and reduced imports of raw materials and semi-finished manufactured goods for industry. The Government projects that 1994 commodity imports will increase by nearly 10 percent, driven by consumer durables and investment goods. Consequently, the trade surplus is expected to drop from DKK 43 billion in 1993 to about DKK 35 billion in 1994. Trade and Investment Barriers: As a result of the EU Single Market, many mandatory EU industrial standards have been harmonized. Denmark has the best record of all EU countries regarding implementation of Single Market directives. U.S. products which are marketable in Denmark thus should also be marketable in other EU countries. However, an investigation by the Danish Government and the Confederation of Danish Industries (DI) reveals that as EU standards become harmonized, other local non-tariff barriers surface in many EU countries. To help resolve this problem, which will also assist U.S. exporters' access to the EU, the European Commission, the Danish Government and the DI are jointly sponsoring a conference in September 1994. For information about tariffs and investment restrictions, please refer to the section titled "Major Roadblocks to Doing Business" above. Labor Force: Despite Denmark's location on the outskirts of the EU, its stable, productive and well-educated labor force, reasonable corporate taxes, low wage increases and inflation, and the absence of labor/management disputes, make it worth considering for U.S. companies wishing a presence in the EU. Due to high taxes and limited social security contributions by employers, Danish wages appear high by international standards, but total hourly labor costs, for example, are lower than those in Germany, Sweden and Norway. High-paid foreign staff working in Denmark enjoy lenient income taxation of 25 percent of gross income plus a five percent labor market contribution tax. Government-funded leave programs attracted close to 50,000 persons in the first four months of 1994, about 20,000 shifted from unemployment to leave. The Government initially expected only 20,000 persons to take leave in 1994 as a whole. The Government's projection has now been revised to 40,000, and this figure is probably still conservative. However, unemployment is slow to respond and actually increased in the first quarter of 1994. This is partially explained by delays in implementing re-employment programs, and in part because many of the jobs of those taking leave in the private sector were not refilled. Nevertheless, the effect of the leave programs will show in coming months and will lead to a reduction in "official unemployment" in 1994, perhaps by more than the 20,000 to 330,000, or 11.4 percent of the labor force, projected by the Government. However, as labor statistics become increasingly opaque due to the government-funded leave and other labor "assistance" programs, the focus is gradually shifting from unemployment to job creation. In 1993, the private sector lost 35,000 jobs which were partially offset by an increase in public sector employment of 21,000. For 1994, the Government expects an increase in employment of 25,000, of which about 17,000 will be in the private sector. In early 1994, the number of people out of normal jobs, i.e., the "officially" unemployed, leave-takers, people on government-funded job-offers employment, and training programs, exceeded 500,000, or more than 17 percent of the labor force. With an increasing number of new entrants in the labor force, which is normally a feature of an the economic upswing, and continued productivity gains, even strong economic growth in 1994 will not result in a real unemployment reduction. If the number of early retirees and people on social welfare are added, the total number of people of active working age (18-66 years old) dependent on government transfer payments exceeds one million, or about one-third of the working age population. This major problem will have to be addressed, but the rigidity of the Danish welfare system and the present political alignment will not allow an early resolution. Major Local and Third Country Competitors: Germany, Sweden, and the United Kingdom are the most formidable national competitors the United States faces in Denmark. Three other European countries also exceed the United States in direct export sales to Denmark. However, upon examination we must quote Pogo and say, "We have found the enemy and he is us." Germany, the direct export leader, normally has something like 25% of the Danish import market. The United States has only about six percent in the form of direct exports but at least an additional 25% in the form of sales of American branded products manufactured in or shipped from third countries. Even if we ignore this figure, the United States is the largest non European supplier and quite competitive in the Danish market considering geography and Denmark's EU membership. Infrastructure Situation Re Goods/Services Distribution: Denmark possesses a first class distribution infrastructure including excellent telecommunications, a high quality nationwide highway and rail network and airports accessible from all population centers (see also "Business Infrastructure" below). Copenhagen is a major port with free port facilities and is ideally situated as a transit point into the Baltic. Many multinational firms utilize Denmark as a distribution point for Scandinavia or the Baltic littoral. Denmark has shown a continued willingness to invest in infrastructure improvements which is currently evidenced by a major expansion of Kastrup (Copenhagen) Airport and three bridge/tunnel projects projected to cost US$3 billion each. The latter include a connection between Eastern and Western Denmark, a connection between Copenhagen and Malmo, and a possible connection across the Baltic from Southern Denmark to Northern Germany. When these projects are completed, a new northern European land route will exist connecting all of Scandinavia to Germany in what many hope will form a new Hanseatic League. Major Infrastructure Projects Underway: The major current infrastructure projects currently underway in Denmark are listed under "Major Business Opportunities" above.