Denmark Causes and results of the economic recession of 2007 2009

Content Denmark Economy Data________________________________________________________2 Causes of the 2007-2009 recession in World Economy and Denmark_____________________2 The effect of 2007-2009 crisis on the economy of Denmark, and the response of the government on it____________________________________________3 Summary____________________________________________________________________ 6 Bibliography__________________________________________________________________8 Denmark : Causes and results of the economic recession of 2007-2009 Denmark Economy Data All data in this chapter is provided according to the website http://www.theodora.com GDP: $199.1 billion in 2009 GDP real growth rate: -3.6% in 2009 GDP per capita: $36.200 in 2009 Denmark map (http://news.bbc.co.uk 2010) Labor force: 2.85 million in 2009 Unemployment rate: 3.6% in 2009 Inflation rate: 2.3% in 2009 Causes of the 2007-2009 recession in World Economy and Denmark. According to the website www.world-crisis.net (2010) the term recession is applicable to a contraction phase of a business cycle, or in other words the time period of a reduced economic activity. Recessions in world economy appear regularly, the IMF states that over each 8 – 10 years of an economy cycle a recession takes place. However for the years 1982-2001 the financial crisis in world economy have been less frequent, equal to only two recessions for this certain period of time. In 2007 the economy of US, due to various reasons such as house market correction or sub-prime mortgage crisis, faced recession. Since US economy represented 21% of world economy, it was predictable that the financial crisis started in the States spread over other countries and turned to a global one. There are several theories of the real causes of the fall down of the U.S. economy. The website www.crisishelper.com (2010) states that the main reason of the recession is that in July 2007 investors lost their confidence in the sphere of securitized mortgages, which led to a liquidity crisis. This followed with large injections of capital in the financial markets. Resulting into high instability of stock markets, finally leading to a crash in September 2008, followed by the bankruptcy and closure of many banks, mortgage lenders and insurance companies. Another popular theory of the cause of the recession of 2007-2009 is the Conspiracy theory, according to which the Federal Reserve is responsible for controlling the world markets and implementing the system of fractional-reserve banking, which leads to the creation of debt bubbles in the economy. Considering the fact that US is the largest non-European trading partner of Denmark accounting of 4.4% of total trade and that in 2007 there were 402 U.S. owned companies operating in Denmark According to http://www.traveldocs.com, the fact that after Americas recession Denmark was one of the many countries affected by the crisis, is quiet clear. The effect of 2007-2009 crisis on the economy of Denmark, and the response of the government on it. Denmark entered the recession period in the middle of the 2007 and since then displayed a considerable slowdown. In the year 2008 the Danish economy contracted to 1.1%, in the next year the number has already reached 5.3%. Although in the year 2008 the budget had $11.79 billion surplus, in 2009 it already faced a deficit of $668 million. Confederation of Danish Industry 2010 A theory of hysteresis states that when a certain economy falls into recession the aggregate demand falls leading to the rise of unemployment and often a long term unemployment, consequently shrinking the labor force. Thus the aggregate supply shifts left and leads to a permanent output fall. What occurred in many countries after the hit of the crisis in 2007 caused hysteresis including Denmark, leading to fall of exports in Denmark to about 20% and the rise of unemployment from 3% in June 2008 to 6.4% nowadays, moreover with a prediction of reaching double digits till 2011. Besides the hysteresis in Denmark the decrease of foreign labor recruitment only contributed to the decline of the labor force. Another important point is that during the unemployment, many people seek to improve their education. The same phenomena appeared in Denmark, during the recession a large number of the currently unemployed workers participated in the educational activation schemes, thus decreasing already weakened labor force. Taking into account the depth of the recession it is highly possible that the medium-term consequences for the Danish economy are considerably negative. The current actual unemployment, which is admirably high, has a great chance to lead to structural unemployment that has appeared already in many countries affected by the financial crisis of 2007-2009. However considering strong active labor programs in the labor market of Denmark the forecast percent of structural unemployment is lower than in other OECD countries. Furthermore the reduction in the working-age population the rise of potential employment is predicted to be weak, which leads to the subduing of the potential growth of the economy. Summarizing these causes the predicted output growth is to decline from 1.7% to an average of 1.1% in 2011-2017. Confederation of Danish Industry 2010 The macroeconomic theories of the relation between demand and supply are fundamental for every economy. The AD curve displays the relation of the demand and price, and when the demand falls it causes the LM line shift left, decreasing the price and changing the equilibrium. During the recession the whole Europe faced the problem of food price increase and decrease in the real estate sector. The fall down of the estate sector in Denmark was considerably higher than among the rest of Europe. One of the reasons of this problem is the boom of building constructions in Denmark since the end of 2006, leading to a huge number of apartments in biggest Danish cities. Thus when the Purchasing Power in Denmark decreased and the supply remained still high it caused the collapse of the estate sector. For instance in Copenhagen the prices for realty declined on 25%. Denmark among with UK are the founding countries of EU that did not accept euro as the official currency of the state, however both pound sterling and Danish krone are very dependent from euro. In 2007 the inflation rate was equal to 1.7%. According to the website http://www.globalpropertyguide.com However due to the recession in 2008 it already increased to 3.4%. In order to return the inflation rate back to normal percentage, the Danish government decreased taxes and freed some pension saving, and enhanced the consumer spending by stimulating it with $10.6 billion incentive. The central bank of Denmark managed to hold a 2.25 percent band with euro by cutting the main interest rate to and ultimately low 1.15 percent, fighting the inflation caused by the fluctuations of oil price. These steps taken by the Danish government led to the decrease of the inflation rate to 2.3% in 2009, and averaging 2% in 2010, and with a positive forecast of 1.7% in 2011. Another important steps taken by the Danish government to fight the recession in the financial sector was enforcing two stimulus packages. In October 2008 the first stimulating package ensured the guaranty of bank deposits and unsecure bank debts. Furthermore the establishment of banking funds for the purpose of terminating insolvent banks and the prevention of more banks from bankruptcy. However this certain funds did not cover mortgage banks. The second stimulus package followed in January 2009, when Danish government loaned €13.4 billion for the purpose of strengthening the capital base of financial institutions. Unlike the first package, mortgage banks were included as the targets for the second one. Summary Denmark was one of the first countries that announced recession after U.S. However due to strong fiscal policy and one of the lowest unemployment rates in Europe the effect of the 2007-2009 Financial crisis was not as hard as on many other EU members. Moreover the continuous problem of low economic growth is still considered as the number one problem of Danish economy, leaving the world economy recession behind. Furthermore effective steps to counter the recession, taken by the Danish government made it possible to have one of the lowest growth of unemployment rate in Europe. The stimulus packages issued by the Central Bank of Denmark assisted the banks and saved them from bankruptcy. This fact plus cuts in taxes made possible to return the inflation rate back to normal in three years. However the recession still caused great damage to the economy of Denmark. The rapid fall of export, which led to the decrease of national income. The stimulus packages resulted in a budget deficit. The shrinking of the labor force. Finally resulting into the decrease of the whole state economy. The longest World Crisis which is considered to last 18 months overall made great damage to many members of the European Union. Denmark the first affected country in EU struggled but due to good fiscal and monetary policies was able to overcome the recession with minimal damage. Bibliography Confederation of Danish Industry, The Danish economy has gone into a recession of historic dimension, 2009, January 23, Denmark, retrieved on 28th of November from <http://di.dk/SiteCollectionDocuments/Downloadboks%20-%20lokale%20filer/2009/OM%20DI/English/The%20Danish%20economy%20has%20gone%20into%20a%20recession%20of%20historic%20dimensions.pdf> Countries of the World, Denmark Economy 2010, 2010, January 15, retrieved on 27th of November from <http://www.theodora.com/wfbcurrent/denmark/denmark_economy.html> Crisis Helper, Financial Crisis of 2007-2009, 2009, retrieved on 27th of November from <http://www.crisishelper.com/world_economic_crisis/Financial_crisis_of_2007-2009.html> G. Sulugiuc, Danish Inflation Accelerates to 1.4% on Stimulus, Oil Price, 2010, January 10, retrieved on 26th of November from <http://www.businessweek.com/news/2010-01-11/danish-inflation-rate-fell-to-16-year-low-in-2009-update1-.html> Global Financial Crisis Portal, Financial and Economic Crisis, Recession: History and Theory, 2008, retrieved on 28th of November from <http://www.world-crisis.net/financial-crisis/recession.html> Global Property Guide, Resilient mortgage market cushions house price falls, 2008, May 12, retrived on 26th of November from< http://www.globalpropertyguide.com/Europe/Denmark/Price-History> M. Saragosa, Danish recession warns of tough times, 2008, July 28, retrieved on 26th of November from <http://news.bbc.co.uk/2/hi/business/7529314.stm> Organization for Economic Co-Operation and Development, Economic Survey of Denmark 2009: Denmark: the crisis and beyond, 2009, November 5, retrieved on 30th of November from <http://www.oecd.org/document/23/0,3343,en_2649_34569_43964951_1_1_1_1,00.html> Travel Document Systems, Denmark: Economy, 2009, retrieved on 27th of November from <http://www.traveldocs.com/dk/economy.htm> 8