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ANALYSIS

DANMARKS

NATIONALBANK 9 DECEMBER 2020 — NO. 26

OUTLOOK FOR THE DANISH — DECEMBER 2020 Spread of coronavirus delays recovery

Two-speed Danish economy Increased infection rates and new restrictions in and abroad are again slowing down parts of the economy, delaying recovery. At the same time, activity is high in substantial parts of the economy, leading to a two-speed economy.

Growth picking up in 2021 is expected to be weak over the winter, picking up in 2021 as the population is vaccinated and restrictions are likely to be eased. Aggregate activity is expected to have largely recovered by 2022.

No current need for further fiscal stimulus To ensure a smooth in industries that are not affected by restrictions, and in which activity is already high, should not be eased further currently. Industries affected by restrictions may still need access to temporary relief measures. ANALYSIS — 2 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

Outlook and

Resurgence of coronavirus delays During the autumn, several business confidence in- Denmark’s dicators deteriorated and are now pointing towards The coronavirus pandemic has been resurging in declining economic activity, although the deteri- Denmark and since September, leading to oration is considerably weaker than in the spring. the imposition of a series of restrictions that will The US growth slowdown is less pronounced than hamper economic activity over the winter. On the in Europe, but the recent strong resurgence of the other hand, the roll-out of an effective vaccine has coronavirus in the USA increases the risk that growth moved closer, and with it also the time when many will slow here as well. In , which has seen a restrictions are likely to be eased again. strong recovery, GDP is higher than before the pan- demic struck. In the 3rd quarter, large parts of the Danish econ- omy had reopened after the spring lockdown, and The pandemic affects different parts of the econ- gross domestic product, GDP, grew by 4.9 per cent, omy differently. In the euro area, restrictions and driven by and private . Con- behavioural changes are hampering the service sumption especially increased in the parts worst sector, in particular, and restrictions have caused a affected by the spring lockdown such as clothing notable shift of consumption from certain services stores and restaurants. However, when the pandemic towards goods. This supports industrial resurged, GDP was still 4.1 per cent lower than at the and growth in global trade in goods, which is almost end of 2019. back at pre-pandemic levels. Conversely, trade in services, including travel, remains weak. So far, the current restrictions in Denmark and most other countries are not as severe as those seen in the Services exports severely spring and, therefore, the economic consequences affected by restrictions of the rise in infection rates are generally smaller. developments are reflected in Danish Restrictions reduce the consumption of some ser- exports, which are considerably lower than before vices such as travel and, most recently, restaurants the coronavirus outbreak, although they have recov- and culture activities and shift consumption towards ered slightly since the start of the summer. Services industries that are not affected by restrictions such exports have been hit the hardest, down 20 per cent as the trade. Several of these industries are re- in the 3rd quarter relative to the 4th quarter of 2019, cording substantially higher revenue than before the in real terms. The sharp drop is mainly attributable coronavirus outbreak. Overall, the Danish economy to tourism and aviation, which have periodically is still growing, albeit with considerable differences been shut down completely due to restrictions. Until across industries. In September, close to 60 per cent the pandemic is over, activity in these industries is of the economy recorded higher than pre-pandemic expected to remain very low. revenue, while revenue in the rest of the economy was lower. Thus, the Danish economy is currently a Danish exports of goods are affected less severely two-speed economy. than exports of services, down 3 per cent in the 3rd quarter relative to end-2019. Exports of goods are Spread of coronavirus comprised largely of agricultural products, pharma- weakens European recovery ceutical products and wind turbines. Demand for New measures to contain the spread of coronavirus these products is less reliant on activity abroad, and have paused the European economic recovery in the the composition of exports of goods has been a 4th quarter after strong growth over the summer. buffer against the economic downturn abroad.1 Agri-

1 See Adrian Michael Bay Schmith and Helle Eis Christensen, Large drop in Danish exports, but the composition might ease the fall, Danmarks Nationalbank Economic Memo, No. 8, June 2020 (memo available in Danish only). ANALYSIS — DANMARKS NATIONALBANK 3 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

cultural exports will be impacted by lower exports of fur skins after the culling of all Danish mink. However, Consumption was boosted Chart 1 due to the relatively small size of Danish fur exports, by October’s disbursement the overall economic consequences will be limited, of holiday allowance although appreciable for some local communities. Index, 2020 = 2019 equals 100 160 Disbursement of holiday pay Housing- Consumption is less hampered 140 related by restrictions than in the spring Clothes and 120 shoes Consumptions quickly picked up, as many restric- Total revenue 100 tions were eased over the summer, and was boosted Restaurants 80 further by the disbursement of holiday allowance in and bars October, see Chart 1. 60

40 Travel agencies, Card turnover is currently close to its 2019 level, 20 etc. despite increased infection rates this autumn and 0 the introduction of more restrictions, most recently Jan Mar May Jul Sep Nov the lockdown of restaurants and cultural activities in parts of Denmark. However, restrictions are imposed Note: Card turnover covers Danish cards processed by Nets. on fewer industries and are mostly less restrictive The turnover is a seven-day moving average up to and including 5 December 2020. From 6 April 2020, a compari- than seen in the spring. Thus, up until December, son has been made with 15 April 2019 to ensure a correct card turnover in restaurants and bars was consider- comparison of the Easter weeks. From 10 October 2020, a ably higher than in the spring; however, restrictions comparison has been made with 12 October 2019 to en- sure a correct comparison of the autumn half-term break. contribute to shifting consumption towards indus- From 23 November 2020, a comparison has been made tries that are not affected by restrictions. with 25 November 2019 to ensure a correct comparison of the Black Friday period. The categories are broadly defined and comprise related goods as well as services. Although household consumption quickly recovered Source: Nets Denmark A/S and own calculations. after the lockdown, it is still lower relative to house- hold income than before the pandemic struck, and are high. However, households are widely Savings were already Chart 2 expected to revert to pre-pandemic consumption high before the pandemic and savings patterns. This is due to several reasons. Kr. billion Per cent of disposable income 1,350 30 Firstly, the increase in savings is assessed to be driv- Disbursement of holiday allowance, autumn 2020 and spring 2021 1,250 25 en largely by restrictions, rendering it partly involun- 1,150 20 tary, while precautionary savings has only played a Disposable income minor role.2 1,050 15 Private consumption 950 10 Lockdown Secondly, households have been consolidating since 850 5 the and already had high savings 750 0 before the outbreak of the pandemic, see Chart 2, Savings ratio 650 (right-hand axis) -5 indicating that household savings ratios may return 550 -10 to pre-pandemic levels relatively quickly. 05 07 09 11 13 15 17 19 21

Thirdly, there are no clear signs that the pandemic Note: The chart shows semi-annual observations. The vertical will lead to permanent changes in the composition line marks the transition from data to projection. Dispos- of household consumption. When restrictions were able income is adjusted for estimated disbursement of frozen holiday allowance, restructuring of capital pen- eased in the spring, consumption by older age sions and savings under LD in 2013 and 2015. Source: Statistics Denmark and own calculations.

2 Precautionary savings are estimated to account for about 5 per cent of the rise in the savings ratio from the 4th quarter of 2019 to the 2nd quarter of 2020, while 85 per cent of the increase was driven by factors such as restrictions. Estimates are based on the approach used in Maarten Dossche and Stylianos Zlatanos, Covid-19 and the in- crease in household savings: precautionary or forced?, ECB Economic Bulletin, No. 6, 2020. ANALYSIS — DANMARKS NATIONALBANK 4 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

groups rapidly increased – even in parts of the econ- are expected to boost private consumption by kr. 23 omy requiring high levels of social interaction.3 billion from the 2nd half of 2020 until early 2022.

Consumption boosted by High turnover and surging the disbursement of holiday allowance prices in the housing market The disbursement of three weeks of frozen holiday al- Trading activity in the housing market is high, and lowance boosted consumption by at least kr. 3 billion the number of homes on the market has declined. in October alone, see Box 1. The holiday allowance While prices fell during the March lockdown, they has to a minor extent only benefited industries affect- have since been surging, and in the 3rd quarter they ed by restrictions. Instead, the disbursement has been were 4.3 per cent and 6.6 per cent higher than last spent in parts of the economy in which activity was year for single-family houses and owner-occupied already high, for instance DIY and clothing stores. flats, respectively.

The holiday allowance is likely to support activity for These price increases are largely explained by some time to come, as larger consumption decisions income and developments. Household such as car purchases or home improvements may incomes have been supported by compensation be made with some delay. Moreover, in December, an schemes, while mortgage rates have been trending agreement was adopted to allow employees to cash slightly downward since 2019. Household confidence in the final two weeks of frozen holiday allowance as about their own financial situation has remained rel- well. Overall, the disbursements of holiday allowance atively high despite the pandemic, which also helps

Holiday allowance will boost consumption by kr. 23 billion Box 1

On two occasions, the Folketing (Parliament) has decided Consumption especially benefited DIY stores, home furnish- to allow Danish employees to cash in the holiday allowance ing stores and clothing stores, whose revenue increased by frozen when the Danish holiday act was amended. In August, about kr. 2 billion, while the disbursement did not significantly employees were given the opportunity to cash in three out increase consumption on hotels and restaurants. Estimates of five weeks of frozen holiday allowance in October, at include the disbursement of the -free one-off subsidy to which time kr. 52 billion of a maximum of kr. 60 billion was recipients of transfer incomes totalling kr. 2 billion. cashed in. In December, it was decided to give the opportunity to cash in the final two weeks of frozen holiday The effect on consumption is estimated using detailed card allowance. turnover data. Several factors may cause these estimates to be downward biased: The expected disbursement may have A total of kr. 100 billion may be cashed in, which is expected boosted consumption before the disbursement of holiday to boost consumption by an estimated close to kr. 23 billion allowance; some consumption groups are settled by invoice from the 3rd quarter of 2020 up until and including the 1st rather than payment card; revenue of supermarkets used as quarter of 2022. It is assumed that 86 per cent of the holiday control group may presumably have been supported by the allowance will be cashed in, same as for the disbursement disbursements to some extent. of the first three weeks of frozen holiday allowance; that the effective tax rate on the funds will be 35 per cent; and that Restrictions reduce the impact on employment the marginal propensity to consume will be 43 per cent.1 Using input- calculations, the employment impact of increased consumption is estimated at 2,000 persons for Oc- Disbursements boosted tober. With restrictions reducing consumption opportunities consumption by kr. 3 billion in October for a number of services, the impact on employment is re- Disbursements of the first three weeks of frozen holiday allow- duced, as services tend to have lower import content and be ance is estimated to have boosted consumption by at least more labour-intensive than goods. The impact on employ- kr. 3 billion in October relative to September, in terms of card ment is estimated to have been 2,600 persons if increased turnover. This estimate is subject to considerable uncertainty. consumption had also benefited restaurants and hotels.

1. See Henrik Yde Andersen, Spending when illiquid savings become liquid: evidence from Danish earners, Danmarks Nationalbank Working Paper, No. 161, September 2020.

3 Source: ’s card turnover data. ANALYSIS — DANMARKS NATIONALBANK 5 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

to underpin prices. Moreover, the typical home buy- er has not been as severely affected by the economic Employment is affected Chart 3 consequences of the pandemic as the households in very differently across sectors general.4 Behavioural changes may also have boost- Index, January 2020 = 100 Net figure ed housing demand, increasing the pressure on the 102 60 housing market during the pandemic. However, as Total employment Construc- tion 100 50 housing demand is satisfied or if behaviour normalis- Manufac- turing es, this pressure may abate. 98 40

Trade and Developments in the housing market are expected 96 Transport 30 to be more subdued going forward, with prices 94 20 largely reflecting income growth. However, very low Labour shortages in 92 10 costs of financing, combined with higher disposable (right-hand axis) incomes and temporarily high demand for housing, 90 0 could lead to self-reinforcing increases in house 15 16 17 18 19 20 prices and increased accumulation of debt, which may subsequently result in an abrupt slowdown. The Note: Labour shortages are own season adjustment. market for owner-occupied flats is especially vulne­ Source: Statistics Denmark and own calculations. rable because prices were already high before the pandemic struck.

Lower investment reduces Some corporations will need increased access to corporate borrowing needs credit when having to pay deferred VAT and tax bills Business investment rose in the 3rd quarter as in 2021, which could lead to an increase in the num- demand recovered. However, following the substan- ber of defaults. Corporate credit standards remained tial drop in the spring, investment is still lower than largely unchanged in the 3rd quarter, and there are at the end of 2019, mainly because corporations no indications that access to credit will hamper in- expected a sharp slowdown in growth prospects for vestment when the current relief packages expire. Denmark and the rest of the world. The pandemic has also increased uncertainty, also causing business Low employment in parts of the economy investment to decline.5 Employment increased sharply over the summer and has now recovered almost two thirds of its fall in the Fewer investments reduce corporate borrowing spring. However, real-time indicators suggest that needs. At the same time, Danish corporations have the labour market recovery has lost momentum over increased their resilience by increasing savings for recent months. a number of years before the coronavirus outbreak, and public relief packages have also helped to meet There are considerable differences in the devel- the increased liquidity needs of corporations suffering opment of employment across industries. Despite drops in revenue.6 This means that corporate borrow- significant recovery over the summer, employment ing has risen only slightly during 2020 – also in several is still very low in transport, hotels, restaurants and of the industries affected by restrictions. culture, see Chart 3. The manufacturing industry

4 See Svend Greniman Andersen, Simon Juul Hviid and Agnete Gad, Moderate setback on the housing market, Danmarks Nationalbank Economic Memo, No. 5, June 2020 (memo available in Danish only).

5 See Mikkel Bess, Erik Grenestam, Alessandro Tang-Andersen Martinel- lo and Jesper Pedersen, Uncertainty and the real economy: Evidence from Denmark, Danmark Nationalbank Working Paper, No. 165, 2020.

6 See Alexander Meldgaard Otte, Carina Moselund Jensen, Nastasija Lonchar and Rasmus Mose Jensen, Lower borrowing needs in Danish corporations compared to European during COVID-19, Danmarks Nationalbank Analysis, No. 20, October 2020. ANALYSIS — DANMARKS NATIONALBANK 6 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

has recorded a gradual fall in employment since the spring, possibly reflecting that activity in the Euro area will not recover Chart 4 export-reliant manufacturing industry has been from decline in activity until 2022 affected with some lag. On the other hand, em- Index, GDP in 2019 = 100 ployment in construction is higher than before the 120 pandemic. China 115

The labour market downturn has dampened pri- 110 vate-sector across all industries. The World strongest wage growth is still seen in construction, 105 USA with a large proportion of corporations once again 100 reporting labour shortages. Euro area 95 Outlook of several years of low activity abroad 90 The further recovery of the Danish economy over 2019 2020 2021 2022 the next couple of years especially depends on the deployment of vaccines and the speed of recovery Source: OECD. of export markets.

International organisations expect a gradual re- covery of the global economy in the coming years. The OECD’s December Economic Outlook forecasts Recovery will gain momentum with global GDP growth of 4.2 per cent in 2021 and 3.7 the deployment of vaccines per cent in 2022 following a historic contraction Danish growth is estimated to have slowed down of 4.2 per cent in 2020. The UK and the EU are as- significantly in recent months, and the trend is sumed to enter into a , preventing expected to continue over the winter. Based on a a sudden and sharp deterioration of their terms of number of real-time indicators and the extent of trade. restrictions, GDP is expected to grow by between 0.5 and 1 per cent in the 4th quarter. In the projec- However, the euro area GDP will still be lower at tion, the recovery will regain momentum with the the end of 2022 than in 2019, see Chart 4. The deployment of one or more vaccines during spring weak level of activity is explained, among other 2021, and most restrictions are assumed to have things, by the OECD’s expectation that household been lifted come summer 2021.7 consumption and savings patterns will normalise only gradually and that savings will remain high Consumption has already recovered substantially, until 2022. and the remainder is expected to recover rapidly with the expected easing of restrictions in spring The global economic recovery is underpinned by and summer 2021. Recovery will be more gradual accommodative financial conditions, especially in in Denmark’s export markets, affecting exports and, the form of low interest rates. asset thereby, the need for investment. Because the Dan- purchase programmes and liquidity support mea­ ish economy is less affected than other , sures have helped to contain fluctuations in finan- imports will grow more than exports until 2022. cial markets, thereby more broadly supporting This will weigh on the current account, which will, lending and activity. however, continue to show a considerable surplus.

7 The projection is based on statistics published up until and includ- ing 2 December. This means that the projection does not factor in the impact of recently announced political initiatives, including the latest Finance Act agreement and the introduction of new restric- tions on restaurants and cultural activities in parts of Denmark. The initiatives announced have limited effect on activity, and overall they are not believed to have a significant impact on the projection. ANALYSIS — DANMARKS NATIONALBANK 7 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

Overall, GDP is expected to contract by 3.9 per cent in 2020 and then grow by 2.9 per cent and 3.3 per Output will be slow to recover Chart 5 cent, respectively in 2021 and 2022, see Table 1. Kr. billion (2010 ) 2,300 Activity will be restored to pre-pandemic levels by Pro- jection the end of 2021, but there will still be a backlog com- 2,200 pared to neutral capacity utilisation until the 2nd half GDP 2,100 of 2022, see Chart 5. The Danish economy is expect- ed to move from a mild to a more neutral 2,000 cyclical position over the projection period. 1,900 Employment is expected to rise by 45,000 persons 1,800 from the 3rd quarter of 2020 until the end of 2022 as activity gradually recovers, while 1,700 05 07 09 11 13 15 17 19 21 will decline by 20,000. The increase in employment is supported by labour force growth due to reforms Note: Potential output is the long-term level of sustainable already adopted, including indexation of the statuto- real output in the economy without creating inflationary ry retirement age. pressures. Source: Statistics Denmark and own calculations.

Inflation is expected to rise gradually over the coming years, but remain subdued throughout the projection horizon as a result of low import price and modest wage growth. Relief packages have resulted in higher govern- ment deficits and debt across countries. This could Risk outlook is dominated by the pandemic pose risks to the long-term of public The evolution of the pandemic dominates the risk fi­nances in countries with high , outlook, and the uncertainty surrounding growth leading to the inexpedient tightening of fiscal policy prospects is high. Risks are predominantly negative and financial conditions. over the coming months as rising infection rates may trigger further restrictions and an economic slow- The future of the UK’s relationship with the EU down. remains unclear, and a hard Brexit would reduce growth in the UK and in several other Danish export However, if one or more of the vaccines developed markets. The uncertainty surrounding internation- are quickly given final approval and can be mass al trade conditions post-Brexit is also linked to a produced and distributed widely, economic activity trend towards increased protectionism and global may recover more quickly and emerge stronger than tensions. In the longer term, weaker trade relations assumed. Should the vaccines not be approved, the could lead to poorer utilisation of comparative ad- pace of recovery will be considerably slower than vantages between countries and, therefore, weaker expected. productivity.

Also, the recovery in other countries may be accele­ No current need for further fiscal stimulus rated if consumption and savings patterns normalise Activity is low in the parts of the economy affected faster than expected by international organisations, by restrictions or lower foreign demand. But other which would strengthen export opportunities of parts of the economy – such as construction – are Danish corporations. recording high activity and employment.

Massive relief packages have been implemented to To ensure a smooth business cycle across industries, keep corporations afloat during the pandemic, for fiscal policy should not stimulate demand further at instance by supporting corporate liquidity needs this point; fiscal easing only to a small extent ben- by way of compensation schemes and deferral of efits industries affected by restrictions, and instead payment deadlines. So far, the level of defaults in supports industries in which activity is already high. Denmark has been low, but it could rise with the In other words, fiscal easing increases the pressure in expiry of relief packages. industries that are not affected by restrictions. In that ANALYSIS — DANMARKS NATIONALBANK 8 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

context, the temporary extension of the ‘Housing-Job­ Scheme’ in 2021 is inexpedient. Economic policy

Experience from the spring shows that activity may To ensure a smooth business cycle in industries that quickly return when restrictions are eased. Conse- are not affected by restrictions, and in which activity is quently, the disbursement of holiday allowance may already high, fiscal policy should not be eased further at prove to be unnecessary, or even inexpedient, in this point. Access to temporary relief measures may be terms of ensuring a smooth business cycle, and fiscal necessary for some industries. policy should not be eased further. Economic uncertainty is high, and economic growth could be significantly stronger or weaker than expected. Providing relief measures to industries in which ac- Therefore, it is important to be ready to tighten or ease tivity is currently low comes at a cost to – but the planned fiscal policy. not doing so also comes at a cost. The costs of relief packages should be weighed against the costs of The extension of the ‘Housing-Job scheme’ is inexpedient because it supports activity in industries in which activity viable corporations defaulting, resulting in losses for is high, including construction. employees, owners and society.

Experience from the easing of the lockdown in the spring indicates that households will quickly return to pre-pandemic demand patterns when there are no restrictions or widespread infection. This would indicate that activity will largely return in industries currently suffering from low earnings due to restric- tions.

The possibility of a rapid roll-out of an effective vac- cine also reduces the risk that long-term relief pack- ages will be needed. Both an expected normalisation of the composition of consumption and an early roll-out of vaccines would indicate that industries affected by restrictions should be offered relief, for instance through short-time schemes. Denmark can afford to do so because government debt is low. But it is important that all temporary relief measures to individual corporations are removed as soon as restrictions are lifted. ANALYSIS — DANMARKS NATIONALBANK 9 OUTLOOK FOR THE DANISH ECONOMY – DECEMBER 2020

Key economic variables Table 1

2020 Real growth relative to the previous period, per cent 2019 2020 2021 2022 Q1 Q2 Q3

GDP 2.8 -3.9 2.9 3.3 -1.6 -7.0 4.9

Private consumption1 1.4 -4.1 5.9 4.2 -3.0 -6.3 4.2

Government consumption expenditure 1.2 -0.5 1.8 0.8 -1.8 -1.7 1.0

Residential investment 6.2 4.8 3.7 1.8 6.1 -0.1 -0.3

Government investment 0.3 7.9 3.4 2.6 13.3 -3.0 3.4

Business investment 2.3 -2.8 2.4 4.9 1.0 -9.5 4.8

Inventory investment, etc.2 -0.3 -0.3 0.0 0.0 -0.1 -1.7 1.7

Exports 5.0 -9.4 4.0 6.5 -3.1 -11.6 5.3

Industrial exports 10.1 -2.0 2.1 5.1 1.9 -8.0 3.3

Imports 2.4 -7.4 6.4 6.6 -2.4 -11.9 5.4

Employment, 1,000 persons 3,003 2,980 3,004 3,020 3,012 2,933 2,982

Gross unemployment, 1,000 persons 104 133 126 121 108 154 140

Current account, per cent of GDP 8.9 7.4 6.3 6.6 8.1 8.0 7.0

Government balance, per cent of GDP 3.8 -3.4 -2.0 -1.9 -0.2 -4.4 -1.5

House prices3, per cent year-on-year 3.0 3.1 3.0 2.7 2.4 1.9 4.3

Consumer prices (HICP), per cent year-on-year 0.7 0.3 1.1 1.4 0.6 0.0 0.4

Hourly wages4 (manufacturing), per cent year-on-year 2.5 2.1 2.1 2.4 2.8 2.1 1.9

Source: Statistics Denmark and own calculations.

1. Includes both households and non-profit serving households (NPISH).

2. Contribution to GDP growth (this item comprises inventory investment, valuables and statistical discrepancy).

3. Nominal prices of single-family houses.

4. Statistics Denmark’s implicit wage index. PUBLICATIONS

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