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Executive summary.

The Danish economy has been suffering during the global crisis but beyond the projected cyclical recovery it will need to restore sustained robust growth. While the level of national income is high, the gap vis-a-vis the leading OECD countries has widened somewhat over the past decade. GDP gains have been driven primarily by rising labour utilisation, related to the evolution of the "flexicurity" model, with increases in both the share of the population in work and average hours worked. At the same time, however, productivity has been slowing down.

The Danish economy is currently enduring a rough ride, although less so than some of its neighbours. The effects of the global economic crisis, notably the collapse in world trade, and the impact of the downturn in the domestic property market have combined to produce the largest fall in GDP in over four decades. Monetary policy has eased and measures to relieve financial sector stress and loosen fiscal policy have been extensive:

* In the financial sector, government guarantees, capital injections and liquidity measures have supported the functioning of financial markets and boosted bank capital. Going forward, stress tests may help establish whether banks are sufficiently capitalised to absorb the losses that are yet to surface.

* The fiscal response has been vigorous, reflecting large automatic stabilisers and substantial discretionary measures, and at this point there is no need for additional fiscal stimulus. While the relaxation of the fiscal stance is designed to be temporary, further measures will be required to bring fiscal policy back on track with the longer-term targets.

The depth of the recession is set to have adverse medium-term economic consequences--the first hard test of the "flexicurity" model. Rising unemployment may lead to higher structural unemployment, and falling investment will limit the contribution to growth from capital deepening. While labour demand is currently weak, the efforts to raise labour supply in the longer term will take on new significance. Such efforts now have to offset any medium-term impact of the crisis on labour supply, as well as meet the employment goals required to ensure sustainable punic finances. The recent recommendations of Denmark's Labour Market Commission focus on measures to raise labour supply that are broadly consistent with previous OECD Surveys. This Survey focuses on how to boost productivity.

* The slowdown in labour productivity is at least partly related to the rise in labour utilisation.

While the policy frameworks influencing productivity are generally growth-friendly, there are opportunities to raise productivity over the medium term through action in such areas as research and development, innovation, entrepreneurship, product market regulation and taxation. The government is addressing most of these issues and recently launched a Growth Forum to explore how to improve potential growth beyond the crisis.

* Education is generally a strongpoint of the Danish economy, but the contribution of human capital to productivity growth can and should be raised. Key areas requiring attention are improving education outcomes in compulsory school, reducing the high dropout rate from upper secondary education and encouraging students to make the most of their capacities by moving more rapidly into and through tertiary education.
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Publication:OECD Economic Surveys - Denmark
Date:Nov 1, 2009
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