Monday, November 15, 2010

Scandi Update : Denmark – Budget and big leap in redundancies

Scandi Update
Denmark – Budget and big leap in redundancies
The government clinched a deal with the Danish People's Party and the Christian Democratic Party during the week on the budget for 2011. This is the last budget before the next parliamentary elections, but it is by no means one to soften up Danish voters. Although, true to tradition, the final budget is more expansionary than the original proposal, there has not been a marked change. While final calculations of the fiscal impact of the revised budget bill are not yet available, it will in all probability be in the region of -0.25% to -0.5%. In other words, the net effect of the budget will be lower growth in the Danish economy than with unchanged fiscal policy from 2010 to 2011.

The concrete priorities in the budget deal are naturally a political matter, but we believe that it makes a lot of sense to get to grips with the consolidation of public finances without delay. Denmark faces major fiscal policy challenges over the coming decade due to an ageing population, so there is a need even now to ensure that public debt does not get too big. In this context, a negative fiscal impact in the region of 0.25-0.5% does not
seem unreasonable. Anything more would risk sending the Danish economy back into a state of economic crisis in the short term.

The week also brought new figures for the number of people served with redundancy notices as part of large redundancy programmes, which climbed by 1,610 from 1,981 in September to 3,591 in October. This is a huge increase, taking redundancies to their highest level since January 2009 when the Danish economy was in the grips of the financial crisis.

Before we begin to panic, though, it is important to remember that part of the reason for this jump is the large round of redundancies announced by wind turbine producer Vestas in October. It does not therefore seem to be a reflection of a more widespread or persistent trend.

The increase is still bad news for the labour market, of course, but the situation is not quite as bleak as the figures might immediately suggest. All in all, these redundancy figures confirm the picture of a still fragile labour market. We have still not seen any real turnaround in either unemployment or employment domestically on the back of the relatively healthy economic growth of the past year. Our view is that this trend will persist during the rest of H2, but these latest figures go to show how much uncertainty there is.

Swedish data during the week were a continuous flow of positivism – but in a troubled sea of international events, which is why the outcomes did not manage to have much impact on domestic financial markets.
Strong industrial data and inflation in line with expectations should underline the difficult balancing act the Riksbank has to perform when weighing the impact from international developments, with QE2 now being implemented and renewed worries regarding the PIIGS-economies in general and Portugal and Ireland in particular. However, increased volatility is rarely positive news for the shallow (I beg to differ, but “old financial habits” are hard to break) Swedish financial markets. This held true over these past few days as
well, which is why SEK has weakened and rates have crawled upwards, albeit not in a very dramatic way.

Norway – Inflation remains low
Core inflation (CPI-ATE) was 1.0% y/y in October, lower than either the market or Norges Bank had expected. The latest inflation data therefore support the market's expectation that interest rates will not need to be raised until next summer. It is particularly falling import prices that are helping to pull down core inflation, while domestic price inflation is holding around 2%. Based on the rise in prices of imported consumer goods at importer level in Q3, we expect the decline in import prices to slow gradually during the first part of 2011. At the same time, we have probably seen the worst of unemployment – and so wage growth – in the current cycle. With growing demand pressure, we would therefore think that domestic inflation is also now bottoming out. Rising inflation and above-trend growth in the mainland economy will lead to gradual interest rate increases in Norway from summer 2011.
Full report: Scandi Update : Denmark – Budget and big leap in redundancies

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