Public Information Notices

Denmark and the IMF

Free Email Notification

Receive emails when we post new items of interest to you.

Subscribe or Modify your profile




Public Information Notice (PIN) No. 04/84
August 6, 2004
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Concludes 2004 Article IV Consultation with Denmark

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF's assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2004 Article IV consultation with Denmark is also available.

On August 2, 2004, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Denmark.1

Background

Denmark enjoyed a period of rapid economic growth over most of the 1990s. The fixed exchange rate regime provided an anchor for inflation expectations and underpinned an economic policy directed toward ensuring sound macroeconomic fundamentals. Labor market reforms led to a sustained increase in structural employment, while careful fiscal policy in the context of a clear medium-term sustainability strategy delivered budget surpluses and a steady decline in government debt as a share of GDP. In addition, overall national savings contributed to persistent current account surpluses and a decline in net foreign liabilities.

In 2001, growth started to slow, reflecting domestic initiatives to cool overheating and the downturn in the global economy. By end 2003, output was about one percent below potential, and unemployment had risen somewhat to 6½ percent. In early 2004, conditions appear to be in place for a return to healthy growth: supportive monetary and fiscal policy; healthy domestic balance sheets; strengthening and broadening in the global recovery; and leading indicators suggesting that the pickup in the domestic economy witnessed in late 2003 continues to gain momentum. IMF staff forecast growth to be close to 2 percent in 2004, increasing to 2½ percent in 2005.

Denmark's fixed exchange rate regime continues to serve the country well. Inflation has been low and stable and spreads against euro area interest rates are negligible. Currently, inflation in Denmark is below that in the euro area and is projected to remain subdued. Although the impact of the reduction in indirect taxes and euro appreciation are temporary, capacity constraints are unlikely to be reached until the end of 2005.

Fiscal policy in Denmark is based on a medium-term strategy to accommodate the pressures from an aging population while maintaining the welfare state without increasing taxes. The strategy calls for fiscal surpluses between 1½ and 2½ percent of GDP, annual growth in public consumption being constrained to 0.5 percent, and a 2 percent increase in structural employment by 2010. Denmark is relatively better prepared to deal with the costs of aging than many other countries--members of the Organization for Economic Cooperation and Development (OECD)--but the authorities recognize that additional resolve will be needed to assure the realization of the employment and expenditure targets

Labor market policy is currently focused on increasing the participation rates of both the young and the elderly, and first- and second-generation immigrants. Additionally, the authorities continue to peruse structural reforms aimed at increasing competitiveness in goods markets. To constrain public consumption expenditure, a tax freeze has been implemented with legally binding rules for compliance and the authorities stand ready to implement additional measures if expenditure slippages emerge.

Executive Board Assessment

Executive Directors commended the Danish authorities for their record of sustained structural reform and strong fiscal policy, grounded in a medium-term framework, that has led to fiscal surpluses and a significant reduction in public debt. As a result, the Danish economy has weathered the recent global slowdown and is now well placed to benefit from the global recovery. Several Directors underscored that the Danish experience in many areas offers useful lessons for other countries and represents a good example that it is possible to combine a strong welfare state with high employment and growth. While acknowledging that Denmark has already made considerable progress in preparing for the medium-term challenges of population aging, Directors encouraged further efforts at containing public expenditure and increasing employment toward this goal.

Directors welcomed the indications that economic activity is rebounding. With external conditions improving, and appropriately supportive monetary and fiscal policies in place, Directors saw good prospects for economic recovery in 2004 and for it to gather strength in 2005. The main risks to this outlook stem from the possibility that the recovery in key trading partners might turn out slower than expected, or that growth in private consumption may flag if the pickup in employment is delayed. Some Directors also pointed to the potential impact on demand of future interest rate increases. Risks to the outlook from a sharp correction in housing prices, which have risen gradually over a long period, appear to be well contained.

Directors generally agreed that Denmark's recent fiscal stimulus package was well designed to provide support for the upturn, without undermining medium-term fiscal objectives, while also addressing some longer term structural issues. They cautioned, however, that further fiscal stimulus should be kept as an exceptional response, to avoid jeopardizing the credibility of the medium-term targets.

Directors agreed that Denmark's fixed exchange rate has been a central pillar of the macroeconomic stability strategy, noting that the low spreads in interest rates vis-à-vis the euro area attest to the credibility of the peg. It has served the country well by both anchoring expectations, and ensuring that fiscal policy is focused on medium-term objectives. Directors judged the overall competitiveness of the Danish economy to be healthy. However, the risks to competitiveness could increase should labor costs outstrip productivity growth, in a context of further euro appreciation, and accordingly Directors considered that efforts to further improve the flexibility of labor markets would be helpful. Even though inflation is likely to remain subdued, Directors stressed that wage moderation will remain key to forestall pressures for the real exchange rate to appreciate.

Directors commended Denmark's sustained implementation of a strong medium-term strategy to deal with the fiscal costs of an aging population. They agreed that efforts to control public expenditure growth and increase employment will remain key pillars of the strategy going forward. While acknowledging the helpful role being played by the 2002 tax freeze and the legally binding rules on counties to comply with budget targets, Directors considered that further action to control public consumption growth may very well be required. Many Directors saw scope for a wider application of user fees to allocate public services more efficiently and contain demand pressures. Some Directors also encouraged the authorities to consider specifying spending targets in nominal terms.

Directors commended the strong performance of the Danish labor market-with employment and labor market participation rates that are high by international standards, notwithstanding the maintenance of a generous welfare system. To alleviate labor supply constraints and lower the structural unemployment rate further, they encouraged the authorities to prepare additional reforms, in particular to reduce incentives for early retirement. In this context, they welcomed the launch of the Welfare Commission to consider the sustainability of the Danish welfare state and outline possible reform options.

Directors welcomed the recent reduction in labor income tax rates. With Denmark's marginal labor income tax rates among the highest in OECD countries, they encouraged the authorities to consider further changes in tax and labor compensation structures that would increase incentives to work. The importance of greater wage dispersion, and better integration of immigrant labor was also highlighted in this context. Directors concurred on the complementary role of product market reforms with labor market reforms. They emphasized that the benefits of labor and product market reform would be greater if accompanied by wider EU reforms.

Directors noted that the Danish financial system has remained resilient despite the three-year slowdown. Directors commended the authorities' sound supervisory framework, and their continued efforts to strengthen it further, particularly in the area of insurance companies and pension funds. They welcomed steps to strengthen cross-border cooperation, in view of increasing cross-border conglomeration and mergers. Directors also welcomed the authorities' planned participation in the Financial Sector Assessment Program, and their efforts to further strengthen the framework for Anti-Money Laundering and Combating the Financing of Terrorism.

Directors commended Denmark's outstanding record in extending official development assistance to developing countries, and looked forward to continued exemplary performance in this area. They also welcomed the authorities' commitment to trade liberalization.



Denmark: Selected Economic Indicators


 

1998

1999

2000

2001

2002

2003

2004
proj.


               

Real economy (change in percent) 1/

             

Real GDP

2.5

2.6

2.8

1.6

1.0

0.4

1.8

Net Exports 2/

-1.4

2.6

0.5

0.6

-0.8

0.3

-0.4

Final Domestic demand

4.2

1.2

1.4

1.8

2.0

0.6

2.3

Private consumption

2.3

0.7

-0.7

-0.2

0.6

1.1

3.0

Gross fixed investment

10.1

1.5

6.9

4.9

4.5

-0.4

2.5

Residential buildings

4.2

-1.0

7.7

-5.3

10.5

7.8

3.0

Gross national saving (percent of GDP)

20.8

21.9

24.0

24.4

22.8

22.5

22.0

Gross domestic investment (percent of GDP)

21.7

19.7

21.0

20.5

20.8

19.6

20.1

Labor force

0.3

0.4

0.4

0.4

-0.3

-0.4

0.5

Employment

1.7

1.3

0.7

0.6

-0.4

-1.3

0.3

Unemployment rate (in percent)

6.4

5.5

5.1

4.9

4.9

5.8

6.0

Unit labor cost (manufacturing)

1.9

0.3

-1.7

2.1

1.0

3.2

1.3

GDP deflator

1.0

1.8

3.0

2.1

1.6

2.1

1.6

CPI (year average)

1.8

2.5

2.9

2.4

2.3

2.1

1.7

               

Public finance (percent of GDP) 1/

             

General government revenues 3/

57.9

58.6

56.5

57.1

56.1

56.0

55.9

General government expenditure

56.7

55.4

53.9

54.2

54.6

54.8

54.7

General government balance

1.1

3.2

2.5

2.8

1.6

1.2

1.2

General government structural balance

0.8

2.2

2.1

2.4

1.6

2.1

2.0

General government debt

56.2

53.0

47.4

45.4

45.7

43.3

41.7

               

Money and credit (end of year, percent change)

Domestic credit 4/

9.4

5.8

11.4

9.5

5.1

6.3

...

M3

2.9

4.1

2.0

8.0

10.7

12.5

...

               

Interest rates (percent)

             

Money market rate 5/

4.2

3.3

4.9

4.6

3.5

2.4

2.1

Government bond yield 5/

4.9

4.9

5.7

5.1

5.1

4.3

5.0

             

Balance of payments (In billions of DKr., unless otherwise noted)

Exports

322.0

347.5

405.3

419.8

436.3

428.9

442.3

Imports

-296.7

-300.8

-351.1

-358.1

-376.2

-362.1

-385.3

Merchandise trade balance (f.o.b.)

25.3

46.7

54.1

61.7

60.1

66.8

57.1

Current account (percent of GDP)

-0.9

1.8

1.5

3.1

2.0

3.0

1.8

               

Exchange rate

             

Exchange rate regime

Participant in ERM2

Present rate (May 19, 2004)

Danish Kroner 6.206 per US$1

Nominal effective exchange rate (1995=100)

96.5

95.4

91.9

93.3

93.8

96.7

...

Real effective exchange rate (1995=100) 6/

97.4

97.2

94.2

95.6

97.0

101.3

...


Sources: IMF, International Financial Statistics; IMF, World Economic Outlook; and IMF staff projections.

1/ Staff estimates.
2/ Contribution to GDP growth.
3/ Fiscal revenues and financial balance from 2002 reduced by 0.5 percent of GDP due to a transfer of pensions to private sector.
4/ Lending growth for banks and mortgage institutions.
5/ Data for 2004 refer to April 2004.
6/ Based on relative normalized unit labor cost in manufacturing.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities and this PIN summarizes the views of the Executive Board.




IMF EXTERNAL RELATIONS DEPARTMENT

Public Affairs    Media Relations
E-mail: publicaffairs@imf.org E-mail: media@imf.org
Fax: 202-623-6278 Phone: 202-623-7100