## 1dnkea2024001-print-pdf

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---

### Executive Board Assessment
- Executive Directors endorsed staff’s appraisal and agreed with its thrust.
- Directors commended Denmark’s resilience amid multiple shocks, underpinned by sound policies, strong governance, and robust institutions.
- Directors noted a positive outlook with more balanced growth and stabilizing inflation but cautioned risks are tilted to the downside, including a global growth slowdown; possible escalation of the conflict in Gaza and Israel and Russia’s war in Ukraine; and deepening geoeconomic fragmentation.
- Policy emphasis by Directors:
  - continued sound macroeconomic management;
  - structural reforms to boost productivity and lift long-term growth;
  - monitoring cyclical conditions and long-term spending needs in fiscal policy;
  - safeguarding financial stability, including monitoring commercial real estate risks and nonbank financial institutions (NBFIs);
  - strengthening AML/CFT and cybersecurity frameworks;
  - enhancing labor supply, addressing skills mismatches, and integrating migrants;
  - advancing digitalization, innovation, and business dynamism;
  - maintaining transparent free-trade policies within the multilateral and rules-based trading system;
  - updating estimates of investment needs for climate adaptation.

### Key Findings and Outlook
- Inflation and near-term outlook:
  - "Inflation might temporarily edge up in the coming months due to the lagged effect of last year’s wage collective bargaining agreement before stabilizing at around 2 percent during the second half of 2025."
- Growth and drivers:
  - Growth increasingly driven by an exceptional surge in the pharmaceutical sector and a post-pandemic recovery in the maritime industry.
  - Staff expect robust growth in the near term, driven by pharmaceutical exports, the reopening of the Tyra natural gas field, and a gradual recovery in non-pharmaceutical sectors.
- Risks to growth:
  - Balance of risks skewed to the downside; primary downside risks include a global slowdown, geopolitical conflicts, and geoeconomic fragmentation.
- Fiscal position:
  - Robust public finances; fiscal policy should consider cyclical conditions and long-term spending needs and avoid adding to capacity pressures in the short term.
  - Support for slight easing of the fiscal stance for 2025 and beyond to accommodate increases in health, climate, and defense costs, while closely monitoring fiscal pressures and taking additional adjustment measures if necessary.
- Financial sector:
  - Financial system remains sound but risks persist, particularly related to the commercial real estate sector and NBFIs.
  - Recent tightening of macroprudential policies welcomed; additional borrower-based measures and continued Nordic-wide bank stress test collaboration suggested.
  - Recommendation to develop a systemic risk assessment encompassing banks and NBFIs and finalize a supervisory order to enhance customer protection.

### Recent Developments (selected indicators)
- Growth:
  - Real GDP growth: 2023: 2.5; 2024 proj.: 1.9; 2025 proj.: 1.6 (percent).
  - Output growth accelerated from 1.5 percent in H1 to 2 percent in 2023:H2 (seasonally adjusted).
  - Preliminary GDP estimate indicates a contraction of 1.4 percent (quarter over quarter) in 2024:Q1.
- Labor market:
  - Unemployment rate: 2023: 2.8; 2024 proj.: 2.9; 2025 proj.: 3.0 (percent).
  - Employment has continued to grow steadily; unemployment has crept up to around 3 percent from 2½ percent two years ago.
  - Nominal wage growth accelerated following last year’s collective bargaining agreement.
- Inflation:
  - Inflation (%, average): 2023: 3.4; 2024 proj.: 1.8; 2025 proj.: 2.2.
  - HICP peaked at 11.4 percent in October 2022 and decreased to around 1¾ percent in June 2024.
  - Core inflation (CPI excluding energy and unprocessed food) has fallen to around 1¼ percent in recent months.
- Fiscal metrics:
  - Revenue (% GDP): 2023: 50.1; 2024 proj.: 49.6; 2025 proj.: 48.8.
  - Expenditures (% GDP): 2023: 46.8; 2024 proj.: 47.8; 2025 proj.: 48.0.
  - Fiscal balance (% GDP): 2023: 3.3; 2024 proj.: 1.8; 2025 proj.: 0.9.
  - Public debt (% GDP): 2023: 29.7; 2024 proj.: 28.2; 2025 proj.: 27.3.
- External sector and other indicators:
  - Current account (% GDP): 2023: 9.8; 2024 proj.: 9.0; 2025 proj.: 9.3.
  - Pharmaceutical production rose nearly 240 percent in the past two years (Annex I).
  - Domestic credit growth (%): 2023: 3.2; other years: "..." .
  - 3-month interbank interest rate (%): 2023: 3.4; other years: "..." .
  - 10-year government bond yield (%): 2023: 2.4; other years: "..." .
  - International reserves (% change): 2023: 1.3; other years: "..." .
  - ULC-based REER (% change): 2023: -0.4; other years: "..." .

### Monetary Policy, Exchange Rate, and Financial Conditions
- Monetary policy and exchange rate management:
  - Danmarks Nationalbank (DN) cut policy interest rates by 25 basis points in June 2024.
  - Objective: ensure a fixed exchange rate against the euro (ERM II).
  - DN widened the interest rate spread from -25 to -40 basis points on February 3, 2023.
  - The krone is allowed to fluctuate within the narrow band of +/-  2.25 percent around the central rate of DKr 746.038 per 100 euro.
  - The krone has been fluctuating around the ERM II central rate without any market intervention by DN.
  - Despite the policy rate cut, the monetary policy stance remains tight, with real interest rates well above the historical average.
- Credit, financial conditions, and lending:
  - Credit growth to the non-financial private sector: around 1 percent year-on-year.
  - Lending rates on banks’ new loans have stopped rising; financial conditions and banks’ credit standards have become less tight.
  - Mortgage loans to households continued to grow moderately; demand for credit from the non-financial corporate sector remained subdued.
- Financial system resilience and risks:
  - Non-performing loans (NPLs) remained at around historic lows (  2½ percent).
  - Banks’ return on equity: nearly 16 percent in 2024:Q1.
  - Core Tier 1 capital to risk-weighted assets ratio: 22 percent.
  - Leverage ratio: 5 percent.
  - Liquidity coverage ratio: exceeds 200 percent.
  - Insurance and pension companies: profitability rebounded strongly in 2023, boosting solvency positions.
  - Systemic risks contained but vulnerabilities remain due to high interest rates and commercial real estate (CRE) risks.

### Commercial Real Estate (CRE), Macroprudential Measures, and NBFIs
- CRE market and vulnerabilities:
  - Business property prices fell sharply by -20 percent year-on-year in 2023 (annual average).
  - Signs of business property price recovery, but transaction volumes remain suppressed.
  - Banks’ stage 2 loans in the CRE sector increased from 6.8 percent in 2022 to 8.9 percent in 2023.
  - Danish systemically important banks have significant direct exposures to the CRE sector in the Nordic region.
  - Foreign investors play an important role in real estate transactions, exposing the market to global CRE volatility.
  - Heat map suggests an elevated CRE sector risk.
- Stress testing and resilience:
  - Severe recession stress-test assumptions: cumulative GDP contraction of 6½ percent over three years; unemployment rising to nearly 10 percent; more than 25 percent lower house prices than baseline.
  - Liquidity stress tests assume closure of market access and deposit withdrawals ranging from 10 to 100 percent depending on deposit type.
  - DN stress tests suggest systemic banks have adequate capital and liquidity buffers to withstand severe scenarios.
- Macroprudential and borrower-based policy recommendations:
  - Authorities introduced a 7 percent sector-specific systemic risk buffer at the end of June 2024 to mitigate CRE risks.
  - New property tax system links property taxes to market valuation (implemented January 1, 2024) with rate reductions to mitigate homeowner impact.
  - Recommended borrower-based measures:
    - lower the maximum loan-to-value ratio below the current 95 percent or require mandatory amortization until a certain equity threshold is met;
    - establish a risk-weight floor for riskier mortgages;
    - reduce incentives for bigger mortgages by lowering the high tax deductibility of mortgage interest expenses.
- NBFIs:
  - NBFI sector has grown to around 300 percent of GDP.
  - Insurance and pension companies hold sizable capital and liquidity buffers but face guaranteed products and elevated market risks.
  - Recommended actions:
    - integrate stress testing for insurance and pension firms into supervisory policy;
    - develop a framework for systemic risk assessment encompassing banks and NBFIs;
    - finalize a supervisory order to strengthen duties of firms offering non-guaranteed products to provide clear advice on financial and longevity risks.

### Fiscal Policy Guidance and Long-term Fiscal Outlook
- Short term:
  - Fiscal policy should avoid adding to capacity pressures; exercise tight spending control and save any revenue above budget forecasts.
  - 2024 budget: new discretionary measures were small; government decided to increase defense spending (by 0.4 percentage points of GDP), details pending.
- 2025 medium-term plan and projections:
  - 2025 medium-term fiscal plan suggests a slight decline in the structural balance by around ¼–½ percent of GDP to accommodate aging, climate, and defense costs.
  - Structural balance projected to deteriorate from a surplus of 1 percent of GDP in 2024 to a deficit of ½ percent of GDP by the early 2030s.
  - Public gross debt projected to stay at around 30 percent of GDP through 2033.
- Medium-term fiscal projections (selected):
  - Structural balance (percent of potential GDP): 2021 -0.3; 2022 1.7; 2023 1.7; 2024 1.2; 2025 0.8; 2026 0.4; 2027 0.3; 2028 0.1; 2029 -0.1.
  - Gross debt (percent of GDP): 2023 29.7; 2024 28.2; 2025 27.3; 2026 27.1; 2027 27.1; 2028 27.1; 2029 27.3.
- Recommendation: continue to monitor long-term fiscal pressures and identify additional fiscal adjustment measures as necessary.

### Structural Policies: Labor Supply, Productivity, and Innovation
- Demographics and labor supply:
  - Population aging accelerating; growth of the working-age population expected to turn negative starting in 2025.
  - Government’s DK 2030 Plan envisages raising the number of full-time employment by 45,000 (1.8 percent) by 2030.
- Personal income tax reform:
  - Expected to generate an additional 5,150 full-time equivalent employment (representing 0.2 percent of total employment).
  - Designed to be deficit-neutral—a direct revenue loss of DKr 10¾ billion (0.35 percent of GDP) offset by spending cuts and increased tax revenue.
- Labor market and skills policies:
  - Measures welcomed: reduction in salary requirement limit to DKr 393,000 (equivalent to US$55,000); expansion of the positive list; extension of international students’ job search period from 6 months to 3 years.
  - ALMP spending is 2 percent of GDP.
- Productivity, innovation, and digitalization:
  - Denmark is a global leader in innovation and digitalization but business R&D spending has declined from high levels.
  - Authorities plan to increase the tax deduction for R&D expenditure from 108 percent to 120 percent by 2028.
  - Denmark has produced 13 unicorns since 2010, but nine have left Denmark for the United States and the United Kingdom.
  - Government measures in June 2024 to support startups: improve access to capital, lower taxes, ease regulatory burden, and rationalize business subsidies.

### Geoeconomic Fragmentation (GEF) Risks and Climate Policy
- GEF risks and preparedness:
  - Denmark stepped up efforts to prepare for intensifying GEF, including higher trade barriers.
  - Vulnerabilities: deep integration into global value chains and reliance on specialized exports, like pharmaceuticals.
  - Projected GDP impact under a moderate global fragmentation scenario: between -0.9 and -1.0 percent of GDP.
  - Policy recommendation: continue public-private efforts to identify critical dependencies, evaluate GEF scenarios, and develop mitigation strategies with EU coordination and WTO consistency.
- Climate mitigation and adaptation:
  - Targets: reduce GHG emissions by 70 percent by 2030 (relative to 1990) and reach carbon neutrality by 2045.
  - With ongoing reforms, GHG emissions are projected to be reduced by 68 percent by 2030.
  - On June 24, 2024, government announced the world’s first carbon tax on agriculture and reached a tri-party agreement on carbon taxation on agriculture.
  - Recommended next steps: swift legislation and robust implementation; develop implementation plan for National Climate Adaptation Plan I; update estimates of investment needs for adaptation; review the property insurance scheme (“Storm Surge Scheme”) to make insurance premiums risk-based.

### Annex I — The Danish Pharmaceutical Sector and Its Macroeconomic Implications (selected)
- Pharmaceutical production has more than doubled over the past two years, reflecting Novo Nordisk’s success with new diabetes and obesity drugs.
- Much production occurs abroad under Danish ownership as “merchanting and processing,” so the domestic economy footprint is limited.
- Key statistics:
  - Pharmaceutical exports accounted for 24 percent of total goods export in 2023.
  - Direct employment in pharmaceuticals: less than 1 percent of total employment.
  - Novo Nordisk plans to invest DKr 42 billion (1.7 percent of GDP) over the next five years.
  - Novo Nordisk paid DKr 16 billion in corporate tax in 2023, equivalent to 0.7 percent of GDP and 15 percent of total corporate tax revenue.
- Measurement implications:
  - M&P activities complicate using GDP-based output gap measures for assessing capacity pressures; alternative approaches include excluding M&P-heavy industries or using employment gap and a broader set of indicators (output gap; employment gap; labor market, wage, and price indicators).

### Annex V — Debt Sustainability Analysis (selected)
- Overall risk of sovereign stress: Low.
- Debt sustainability: Debt is sustainable.
- Fiscal balances: Remained in surplus recently; projected to weaken to a small deficit over the medium term.
- Debt-to-GDP ratio projected to remain around 30 percent in the medium term.
- Liquidity risks: Low (GFN Financeability Module).
- Long-term fiscal risks: Low; demographic-related expenditures projected to increase by 1 percent of GDP by 2040.
- Policy guidance: continue to monitor long-term fiscal pressures and identify additional adjustment measures as necessary.

### Annex VII — Geoeconomic Fragmentation and FPE Findings (selected)
- Trade openness: trade in goods (sum of exports and imports) exceeded 70 percent of GDP by 2023.
- Top ten multinational enterprises account for nearly 80 percent of total assets of all publicly listed Danish firms.
- FPE results vs conventional metrics:
  - Manufacturing: FPE to Chinese inputs increased by 8 percentage points to 9 percent.
  - High-tech sector: FPE to Chinese inputs increased by 2.5 percentage points to 4.5 percent.
- Policy implication: FPE highlights deeper integration into Chinese inputs than conventional metrics; recommendation for continued preparedness for GEF risks.

### Staff Policy Recommendations (enumerated)
- Fiscal policy:
  - Calibrate fiscal policy taking into account cyclical conditions and growing long-term spending needs.
  - Short term: avoid adding to capacity pressures given upside risks to inflation.
  - For 2025 and beyond: slight easing of fiscal stance to accommodate health, long-term care, climate, and defense costs; monitor trends and implement adjustment measures if structural deficit limits are at risk.
- Financial sector:
  - Continue close monitoring of financial risks; ensure banks assess borrowers’ creditworthiness and update provisions.
  - Contain CRE risks: adhere to CRE supervisory guidelines; maintain adequate provisioning; ensure internal-rating models capture CRE risks.
  - Continue collaboration on Nordic-wide bank stress testing.
  - Strengthen AML/CFT and cyber resilience.
- Borrower-based and tax measures:
  - Consider additional borrower-based measures to address vulnerabilities; encourage reducing high tax deductibility of mortgage interest expenses.
  - Implement the new 7 percent sector-specific systemic risk buffer and property tax reform.
- NBFI and supervision:
  - Integrate insurance and pension stress tests into supervisory policy; develop a systemic risk assessment framework covering banks and NBFIs; finalize supervisory order to enhance customer protection.
- Labor, education, and productivity:
  - Increase labor quantity and address skill mismatches; proceed with personal income tax reform; continue vocational, education, and recruitment reforms; reform public sector wage setting for health and long-term care.
- Digitalization, innovation, and business dynamism:
  - Continue to accelerate digitalization through Denmark’s Recovery and Resilience Plan; implement entrepreneurship strategy and review R&D tax incentive effectiveness.
- Geoeconomic fragmentation:
  - Continue public-private efforts to identify critical dependencies, assess GEF impacts, and develop mitigation strategies consistent with WTO and EU coordination.
- Climate:
  - Implement measures to meet mitigation targets and prepare for climate change; develop adaptation implementation plan and update investment needs estimates; review the Storm Surge Scheme.

*Source: IMF staff report for the 2024 Article IV consultation with Denmark (staff report text and tables provided in the content unit).*

### 2025. Inflation might temporarily edge up in the coming months due to the lagged effect of last

### 1dnkea2024001-print-pdf - 2025. Inflation might temporarily edge up in the coming months due to the lagged effect of last

### Executive Board Assessment
- Executive Directors endorsed staff’s appraisal and agreed with its thrust.
- Directors commended Denmark’s remarkable resilience amid multiple shocks, underpinned by sound policies, strong governance, and robust institutions.
- Directors noted a positive outlook with more balanced growth and stabilizing inflation but cautioned that risks are tilted to the downside, including:
  - a global growth slowdown;
  - possible escalation of the conflict in Gaza and Israel and Russia’s war in Ukraine;
  - deepening geoeconomic fragmentation.
- Policy emphasis by Directors:
  - continued sound macroeconomic management;
  - structural reforms to boost productivity and lift long-term growth;
  - monitoring cyclical conditions and long-term spending needs in fiscal policy;
  - safeguarding financial stability, including monitoring commercial real estate risks and nonbank financial institutions (NBFIs);
  - strengthening AML/CFT and cybersecurity frameworks;
  - enhancing labor supply, addressing skills mismatches, and integrating migrants;
  - advancing digitalization, innovation, and business dynamism;
  - maintaining transparent free-trade policies within the multilateral and rules-based trading system;
  - updating estimates of investment needs for climate adaptation.

### Key Findings and Outlook
- Inflation and near-term outlook:
  - "Inflation might temporarily edge up in the coming months due to the lagged effect of last year’s wage collective bargaining agreement before stabilizing at around 2 percent during the second half of 2025."
- Growth and drivers:
  - Growth increasingly driven by an exceptional surge in the pharmaceutical sector and a post-pandemic recovery in the maritime industry.
  - Staff expect robust growth in the near term, driven by pharmaceutical exports, the reopening of the Tyra natural gas field, and a gradual recovery in non-pharmaceutical sectors.
- Risks to growth:
  - Balance of risks skewed to the downside; primary downside risks include a global slowdown, geopolitical conflicts, and geoeconomic fragmentation.
- Fiscal position:
  - Robust public finances; emphasis that fiscal policy should consider cyclical conditions and long-term spending needs and avoid adding to capacity pressures in the short term.
  - Support for slight easing of the fiscal stance for 2025 and beyond to accommodate increases in health, climate, and defense costs, while closely monitoring fiscal pressures and taking additional adjustment measures if necessary.
- Financial sector:
  - Financial system remains sound but risks persist, particularly related to the commercial real estate sector and NBFIs.
  - Recent tightening of macroprudential policies welcomed; additional borrower-based measures and continued Nordic-wide bank stress test collaboration suggested.
  - Recommendation to develop a systemic risk assessment encompassing banks and NBFIs and finalize a supervisory order to enhance customer protection.

### Recent Developments (selected)
- Growth:
  - Real GDP growth: 2023: 2.5; 2024 proj.: 1.9; 2025 proj.: 1.6 (percent).
  - Output growth accelerated from 1.5 percent in H1 to 2 percent in 2023:H2 (seasonally adjusted).
  - Preliminary GDP estimate indicates a contraction of 1.4 percent (quarter over quarter) in 2024:Q1.
- Labor market:
  - Unemployment rate: 2023: 2.8; 2024 proj.: 2.9; 2025 proj.: 3.0 (percent).
  - Employment has continued to grow steadily; unemployment has crept up to around 3 percent from 2½ percent two years ago.
  - Nominal wage growth accelerated following last year’s collective bargaining agreement.
- Inflation:
  - Inflation (%, average): 2023: 3.4; 2024 proj.: 1.8; 2025 proj.: 2.2.
  - HICP peaked at 11.4 percent in October 2022 and decreased to around 1¾ percent in June 2024.
  - Core inflation (CPI excluding energy and unprocessed food) has fallen to around 1¼ percent in recent months.
- Fiscal metrics:
  - Revenue (% GDP): 2023: 50.1; 2024 proj.: 49.6; 2025 proj.: 48.8.
  - Expenditures (% GDP): 2023: 46.8; 2024 proj.: 47.8; 2025 proj.: 48.0.
  - Fiscal balance (% GDP): 2023: 3.3; 2024 proj.: 1.8; 2025 proj.: 0.9.
  - Public debt (% GDP): 2023: 29.7; 2024 proj.: 28.2; 2025 proj.: 27.3.
- External sector and other indicators:
  - Current account (% GDP): 2023: 9.8; 2024 proj.: 9.0; 2025 proj.: 9.3.
  - Pharmaceutical production rose nearly 240 percent in the past two years (Annex I).
  - Domestic credit growth (%): 2023: 3.2; other years: "...".
  - 3-month interbank interest rate (%): 2023: 3.4; other years: "...".
  - 10-year government bond yield (%): 2023: 2.4; other years: "...".
  - International reserves (% change): 2023: 1.3; other years: "...".
  - ULC-based REER (% change): 2023: -0.4; other years: "...".

### Policy Recommendations (enumerated)
- Fiscal policy:
  - Continue to take into account cyclical conditions and long-term spending pressures.
  - Avoid adding to capacity pressures in the short term.
  - Support the slight easing of the fiscal stance in 2025 to accommodate increased costs related to health, climate, and defense.
  - Closely monitor emerging fiscal pressures and introduce new measures as necessary to ensure long-term fiscal sustainability.
- Financial sector policy:
  - Maintain vigilance in monitoring the financial system and ensure banks closely assess impacts of financial conditions on vulnerable and leveraged borrowers, especially commercial real estate firms.
  - Update provisions for credit risks as needed.
  - Consider additional borrower-based measures to address pockets of vulnerabilities.
  - Continue collaboration on Nordic-wide bank stress tests.
  - Strengthen AML/CFT and cybersecurity frameworks.
  - Develop a systemic risk assessment covering banks and NBFIs and finalize supervisory measures to enhance customer protection.
- Structural policy:
  - Boost labor supply and enhance productivity to sustain the welfare state.
  - Reform priorities: enhance work incentives; address skill mismatches by accepting more foreign talent; modernize active labor market policies; enhance education outcomes for children with immigrant backgrounds.
  - Further actions to achieve climate mitigation targets and prepare for climate change, including updating estimates of investment needs for climate adaptation.
- Trade and multilateral engagement:
  - Maintain commitment to transparent free-trade policies within the multilateral and rules-based trading system.

### Selected Tables and Annexes Noted
- Table of Selected Economic Indicators (2023–2025 projections) summarized above.
- Annexes include: The Danish Pharmaceutical Sector and Its Macroeconomic Implications; Implementation of Past IMF Policy Recommendations; External Sector Assessment; Risk Assessment Matrix; Debt Sustainability Analysis; Authorities’ Response to Past FSAP Recommendations; Geoeconomic Fragmentation and Trade in Denmark; Proposal of Carbon Taxation on the Agricultural Sector; Data Issues.

*Source: IMF staff report for the 2024 Article IV consultation with Denmark (staff report text and tables provided in the content unit).*

### 8.      Following the European Central Bank (ECB), Danmarks Nationalbank (DN) cut its

### Following the European Central Bank (ECB), Danmarks Nationalbank (DN) cut its policy interest rates by 25 basis points in June 2024.

### Monetary policy and exchange rate management
- DN cut policy interest rates by 25 basis points in June 2024.
- Objective: ensure a fixed exchange rate against the euro (European Exchange Rate Mechanism 2).
- DN widened the interest rate spread (difference between DN’s current account rate and the ECB’s deposit facility rate) from -25 to -40 basis points on February 3, 2023.
- The krone is allowed to fluctuate within the narrow band of +/-  2.25 percent around the central rate of DKr 746.038 per 100 euro.
- The Danish krone has been fluctuating around the ERM II central rate without any market intervention by DN.
- Despite the policy rate cut, the monetary policy stance remains tight, with real interest rates well above the historical average.

### Credit, financial conditions, and lending
- Credit growth to the non-financial private sector: around 1 percent year-on-year.
- Lending rates on banks’ new loans have stopped rising; overall financial conditions and banks’ credit standards have become less tight.
- Mortgage loans to households continued to grow moderately; demand for credit from the non-financial corporate sector remained subdued.
- Factors limiting credit growth: tight financial conditions and sluggish domestic demand.

### Financial system resilience and risks
- Non-performing loans (NPLs) remained at around historic lows (  2½ percent).
- Banks’ return on equity: nearly 16 percent in 2024:Q1.
- Core Tier 1 capital to risk-weighted assets ratio: 22 percent.
- Leverage ratio: 5 percent.
- Liquidity coverage ratio: exceeds 200 percent.
- Insurance and pension companies: profitability rebounded strongly in 2023, boosting solvency positions.
- Systemic risks contained but vulnerabilities remain due to high interest rates and commercial real estate (CRE) risks.
  - Household sector: borrowers refixed/refinanced since 2022 into variable-rate mortgages and some deferred amortization; heightened sensitivity to interest rate changes.
  - Housing market: house prices rebounded in the second half of 2023 but residential activity remained subdued; staff estimate house prices remain slightly overvalued.
  - Corporate sector: debt service burden rose; bankruptcies exceeded 3,000 (up 9 percent year-on-year) in 2023, the highest level since [data period in source].

### External sector and current account
- Current account surplus: 9¾ percent of GDP in 2023, down from 11¾ percent in 2022.
- Goods surplus: expanded from 2¾ percent of GDP in 2022 to 7½ percent of GDP in 2023 (driven by increased pharmaceutical exports).
- Services surplus: fell from 6¾ percent of GDP in 2022 to ¾ percent of GDP in 2023 (primarily due to significant drops in freight and shipping rates).
- IMF staff assessment: external position stronger than implied by medium-term fundamentals and desirable policies.

### Outlook and risks
- GDP growth projections:
  - 2023: 2.5 percent
  - 2024: 1.9 percent
  - 2025: 1.6 percent
- Drivers: tapering of pharmaceutical and maritime export growth; pickup in external demand; improved consumer purchasing power; easing financial conditions; reopening of the Tyra natural gas field contributes to growth in 2024 and 2025.
- Inflation: sequential increase expected in coming months from lagged wage effects; inflation expected to stabilize at around 2 percent year-on-year during the second half of 2025.
- Medium-term potential growth: staff estimate 1.4 percent (about ½ percentage points of GDP below its pre-pandemic growth records of 1.8 percent for the 2012–19 average).
- Balance of risks skewed to the downside:
  - Primary global downside risks: global slowdown, escalation of conflicts (Gaza and Israel; Russia’s war in Ukraine), deepening geoeconomic fragmentation (GEF), trade and supply chain disruptions, higher imported inflation, cyberattacks and misuse of AI.
  - Domestic risks: backward-looking wage-setting leading to higher wage pressures and loss of competitiveness; spillovers from adverse shocks in other Nordic countries (including abrupt corrections in housing and commercial real estate markets).
  - Upside risks: faster-than-expected resolution of regional conflicts and stronger external demand recovery.

### Fiscal policy guidance and long-term fiscal outlook
- Short term: fiscal policy should avoid adding to capacity pressures; exercise tight spending control and save any revenue above budget forecasts.
- 2024 budget: new discretionary measures were small; government decided to increase defense spending (by 0.4 percentage points of GDP), details pending.
- 2025 medium-term fiscal plan: suggests a slight decline in the structural balance by around ¼–½ percent of GDP to accommodate aging, climate, and defense costs; these measures should be temporary and well-targeted if discretionary measures are needed in severe shocks.
- Medium-term fiscal projections:
  - Structural balance projected to deteriorate from a surplus of 1 percent of GDP in 2024 to a deficit of ½ percent of GDP by the early 2030s.
  - Public gross debt projected to stay at around 30 percent of GDP through 2033.
- Long-term risks: structural balance may breach the -1 percent of GDP floor in the mid-2030s; trajectory sensitive to fertility, mortality, net migration, healthcare and long-term care costs, effectiveness of supply-side measures, climate adaptation needs, and potential further defense spending increases.
- Recommendation: continue to monitor long-term fiscal pressures and identify additional fiscal adjustment measures as necessary.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 2010. More recently, however, bankruptcies

### 1dnkea2024001-print-pdf - 2010. More recently, however, bankruptcies

### CRE risks and recent developments
- Business property prices fell sharply by -20 percent year-on-year in 2023 (annual average).
- More recently, there are signs that business property prices are recovering, but real estate transaction volume remains suppressed and commercial real estate markets have not yet fully recovered.
- Banks’ stage 2 loans in the CRE sector increased from 6.8 percent in 2022 to 8.9 percent in 2023.
- Danish systemically important banks have significant direct exposures to the CRE sector in the Nordic region.
- Foreign investors, including one of the largest Swedish firms, play an important role in real estate transactions in Denmark, exposing the Danish CRE market to global CRE market volatility.
- The heat map suggests an elevated CRE sector risk.

### Financial system resilience and stress testing
- Various mitigating factors and banks’ ample capital and liquidity buffers contribute to financial system stability.
- Bank stress-test assumptions under a severe recession scenario:
  - cumulative GDP contraction of 6½ percent over three years;
  - unemployment rate rising to nearly 10 percent;
  - more than 25 percent lower house prices than the baseline scenario.
- Liquidity stress testing under a severe scenario assumes the closure of market access and deposit withdrawals ranging from 10 to 100 percent depending on the type of customer deposits.
- Danmarks Nationalbank (DN) stress tests suggest systemic banks have adequate capital buffers to navigate a severe recession and liquidity buffers to survive a three-month horizon in the most severe liquidity stress scenario.

### Policy recommendations for financial-sector monitoring and supervision
- Maintain vigilant monitoring of households’ creditworthiness; ensure banks closely assess how developments in house prices, labor markets, and financial conditions affect vulnerable borrowers’ balance sheets and update provisions for credit risks accordingly.
- In line with new supervisory guidelines on CRE, banks should:
  - maintain robust underwriting, provisioning, and appraisals when providing loans to CRE firms;
  - ensure internal-ratings models adequately capture CRE risks in estimating risk weights.
- Cross-border macrofinancial risks from the Nordic CRE sector warrant scrutiny; authorities should continue the Nordic-wide bank stress testing exercise and bridge remaining data gaps to strengthen vulnerability assessment in the CRE sector.
- Maintain a heightened focus on cybersecurity risks; DFSA has developed a cyber stress testing framework.

### Macroprudential measures and non-bank financial intermediation (NBFI)
- The authorities introduced a 7 percent sector-specific systemic risk buffer at the end of June 2024 to mitigate CRE-sector risks.
- The new property tax system links property taxes to market valuation (implemented January 1, 2024), with rate reductions to mitigate homeowner impact; effects on house prices will vary across regions and property types.
- Additional borrower-based measures recommended to contain excessive risk-taking:
  - lower the maximum loan-to-value ratio below the current 95 percent or require mandatory amortization until a certain equity threshold is met;
  - establish a risk-weight floor for riskier mortgages;
  - reduce incentives for bigger mortgages by lowering the high tax deductibility of mortgage interest expenses.
- NBFI sector considerations:
  - NBFI sector has grown to around 300 percent of GDP.
  - Insurance and pension companies hold sizable capital and liquidity buffers but still have guaranteed products and elevated market risks.
  - Recommended actions:
    - integrate the stress testing framework for insurance and pension firms into overall supervisory policy;
    - develop a framework for systemic risk assessment encompassing banks and NBFIs to pave the way for a system-wide stress test over time;
    - finalize a supervisory order to strengthen duties of firms offering non-guaranteed products to provide clear advice on financial and longevity risks.

### Systemic oversight, AML/CFT, and crisis management
- Further efforts needed to implement recommendations from the 2020 FSAP (Annex VI); progress made in bank and insurance supervision and systemic liquidity, but several recommendations on systemic risk oversight and governance of resolution authorities remain pending.
- Progress in strengthening AML/CFT framework following the 2023 Nordic-Baltic regional TA report; recommended continued efforts to:
  - further enhance data collection and information, including cross-border financial flows;
  - monitor and analyze emerging threats such as trade-based money laundering;
  - develop a tailored methodology for higher risk jurisdiction lists;
  - ensure supervisory resources adequately assigned to non-bank financial institutions;
  - enhance the framework to assess impacts of financial integrity events on financial stability.

### Structural reforms: labor supply and productivity
- Demographics and labor supply:
  - population aging is accelerating; growth of the working-age population is expected to turn negative starting in 2025.
  - The government’s DK 2030 Plan envisages raising the number of full-time employment by 45,000 (1.8 percent) by 2030.
- Personal income tax reform:
  - expected to generate an additional 5,150 full-time equivalent employment (representing 0.2 percent of total employment);
  - designed to be deficit-neutral—a direct revenue loss of DKr 10¾ billion (0.35 percent of GDP) offset by spending cuts and increased tax revenue.
- Labor market and skills policies:
  - staff welcomes reductions in salary requirement limit to DKr 393,000 (equivalent to US$55,000), expansion of the positive list, extension of international students’ job search period from 6 months to 3 years, and streamlined administrative processes; impact should be monitored.
  - ALMP spending is 2 percent of GDP; an expert group proposed ALMP reform options to save costs and improve customer satisfaction—careful implementation is recommended.
  - Develop programs to enhance education outcomes for children with immigrant backgrounds and strengthen their integration.
- Productivity, innovation, and digitalization:
  - Denmark is a global leader in innovation and digitalization but business R&D spending has declined from high levels.
  - Authorities plan to increase the tax deduction for R&D expenditure from 108 percent to 120 percent by 2028.
  - Business dynamism: Denmark has produced 13 unicorns since 2010, but nine of them have left Denmark for the United States and the United Kingdom.
  - The government launched measures in June 2024 to support startups (improve access to capital, lower taxes, ease regulatory burden) and to rationalize business subsidies.

*Source: DENMARK, INTERNATIONAL MONETARY FUND (provided content).*

### 31.      Denmark has stepped up efforts to  prepare for intensifying geoeconomic

### 1dnkea2024001-print-pdf - 31.      Denmark has stepped up efforts to  prepare for intensifying geoeconomic

### Geoeconomic fragmentation (GEF) risks and preparedness
- Denmark has stepped up efforts to prepare for intensifying geoeconomic fragmentation (GEF), including higher trade barriers (Annex VII).
- Vulnerabilities:
  - Deep integration into global value chains and reliance on specialized exports, like pharmaceuticals, make Denmark vulnerable to GEF risks.
  - Higher trade barriers could lead to shortages of critical inputs.
  - Abrupt regulatory changes abroad could adversely impact operations and profitability of multinational enterprises.
- Policy stance and recommended actions:
  - Commitment to supporting multilateral and transparent trade policies that promote mutually beneficial cooperation on global trade, knowledge, and investment flows.
  - Joint public-private efforts should continue to:
    - Identify critical dependencies.
    - Evaluate the effects of geoeconomic fragmentation scenarios.
    - Develop risk mitigation strategies, with close coordination at the EU level and consistent with the WTO framework.
  - Vigorously pursuing structural reforms will also help mitigate GEF risks.

### Climate change policy: mitigation and adaptation
- Targets and projections:
  - Denmark aims to reduce greenhouse gas (GHG) emissions by 70 percent by 2030 (relative to 1990 levels) and reach carbon neutrality by 2045.
  - With ongoing reforms, GHG emissions are projected to be reduced by 68 percent by 2030, slightly falling short of the 70 percent target.
- Recent policy measures:
  - On June 24, 2024, the government announced the world’s first carbon tax on agriculture, complemented by efforts for afforestation, removal of carbon-rich lowlands, farmland purchase, and reduction of nitrogen emissions from fertilizers (Annex VIII).
  - A tri-party agreement on carbon taxation on agriculture was reached on June 24 (authorities view).
- Required next steps:
  - Swift legislation and robust implementation of the agreement to achieve mitigation targets.
  - For adaptation:
    - National Climate Adaptation Plan I (presented in October 2023) appropriately focuses on coastal and groundwater protection.
    - Next steps include developing its implementation plan and updating estimates of investment needs for adaptation.
    - The property insurance scheme (“Storm Surge Scheme”) should be reviewed to make insurance premiums risk-based.

### Authorities’ views (summary)
- Economic outlook:
  - Authorities broadly agreed with staff’s assessment: growth in households’ real wages and improved foreign demand will support growth in 2024 and 2025.
  - Labor shortage had decreased somewhat due to a large influx of foreign workers; Danmarks Nationalbank (DN) emphasized the labor market remained tight with still rising employment.
- Fiscal policy:
  - Ministry of Finance indicated expected moderation of capacity pressures would allow gradual easing of the fiscal stance without raising inflationary pressures significantly.
  - Noted gradual easing of fiscal policy this year and next is appropriate given a tight starting point; specifics to be determined in the 2025 budget process.
  - DN cautioned fiscal policy should currently not stimulate demand given the tight labor market and recent period of very high inflation.
- Financial system and macrofinancial risks:
  - Authorities assessed the financial system as sound but acknowledged risks from higher interest rates and heightened CRE market vulnerability.
  - Supported a Nordic-wide bank stress testing exercise.
  - Introduced a new 7 percent sector-specific systemic risk buffer to strengthen resilience against CRE-related shocks.
  - DN argued for tighter borrower-based measures, a legal basis for binding borrower-based measures, and lowering tax deductibility of interest expense.
  - Ministries were concerned borrower-based measures could adversely affect the housing market and households’ ability to repay and smooth consumption; sought further analysis before introducing additional measures.
  - On 2020 FSAP recommendations on institutional arrangements of the financial sector, ministries did not see need for legislative changes.
- NBFIs:
  - Authorities assessed NBFI risks as contained: insurance and pension firms have ample capital buffers; significant share of non-guaranteed market-return products limits exposures; most investment funds are closed-end, reducing liquidity concerns.
  - Agreed on benefits of developing a systemic risk assessment framework combining banks and non-banks; would only consider a system-wide stress testing framework at a later stage.
- Structural reforms and labor:
  - Authorities committed to structural reforms to enhance business dynamism, boost labor supply, reduce skill mismatches.
  - New entrepreneurship strategy expected to boost startup activities.
  - Ongoing reforms on personal income tax, master degree programs, and foreign workers expected to increase labor supply.
  - Further reforms needed in public sector wage setting and vocational training, especially for health and long-term care sectors.
  - Education of immigrant descendants has constantly improved; authorities committed to further improvements.
- Climate:
  - Authorities committed to meeting climate goals and strengthening resilience to climate change.
  - Emphasized coastal protection and flooding as priority for adaptation.
  - Acknowledged merit of costing investment needs for adaptation but indicated responsibility for coastal protection and flooding lies with municipalities.
  - Agreed on exploring reform options for the property insurance scheme (“Storm Surge Scheme”).

### Staff appraisal — outlook, risks, and policy recommendations
- Outlook and risks:
  - Near-term economic outlook is positive; growth will moderate as maritime industry growth normalizes and pharmaceutical expansion slows.
  - Expected pickup in external demand, improved consumer purchasing power, and further easing of financial conditions support the outlook.
  - Inflation has fallen with some signs of a cooling labor market.
  - Balance of risks skewed to the downside, including global slowdown, possible escalation of Russia’s war in Ukraine, and deepening geoeconomic fragmentation.
  - Demographic challenges could impact growth potential and long-term viability of the welfare state.
- Fiscal policy recommendations:
  - Calibrate fiscal policy taking into account cyclical conditions and growing long-term spending needs.
  - Short term: avoid adding to capacity pressures given upside risks to inflation.
  - For 2025 and beyond: slight easing of fiscal stance will help accommodate increased costs related to health and long-term care, climate, and defense.
  - Continue to closely monitor long-term fiscal pressures; if fiscal trends risk breaching the structural deficit limit, implement additional fiscal adjustment measures.
- Financial sector recommendations:
  - Continue close monitoring of financial sector risks.
  - Ensure banks closely monitor and assess borrowers’ creditworthiness and adjust credit risk provisions accordingly.
  - To contain CRE-related risks: ensure adherence to new CRE supervisory guidelines; maintain adequate provisioning; ensure banks’ internal-rating models capture risks.
  - Continue collaboration on Nordic-wide bank stress testing exercise.
  - Continue efforts to strengthen AML/CFT framework and resilience against cyberattacks on critical infrastructure and institutions.
- Borrower-based and tax measures:
  - Additional borrower-based measures are needed to address pockets of vulnerabilities and enhance robustness.
  - Implementation of the new sector-specific systemic risk buffer and reform of the property tax are welcome.
  - Consider tightening conditions on new mortgages extended to highly leveraged households.
  - Encourage reducing high tax deductibility of mortgage interest expenses and strengthening institutional arrangement of financial sector policymaking in line with the 2020 Financial Sector Assessment Program.
- NBFI and supervision:
  - Systemic risks from NBFIs warrant closer monitoring and enhanced customer protection.
  - Integrate supervisors’ stress-testing framework for insurance and pension companies into overall supervisory policy.
  - Develop a framework for systemic risk assessment encompassing banks and NBFIs; consider a system-wide stress testing framework going forward.
  - Finalize a supervisory order to strengthen duties of these firms to provide clients with clear advice on financial and longevity risks.
- Labor, education, and productivity measures:
  - Continue efforts to increase labor quantity and address skill mismatches.
  - Forthcoming personal income tax reform is positive for work incentives.
  - Continue reforms in vocational training, education, and recruitment from abroad.
  - Reform public sector wage setting to better address labor shortages in health and long-term care.
  - Closely monitor educational outcomes for students with an immigrant background and strengthen integration efforts.
- Digitalization, innovation, and business dynamism:
  - Authorities’ commitment to enhance digitalization, innovation, and business dynamism is welcome.
  - Denmark’s Recovery and Resilience Plan will help accelerate digitalization.
  - New entrepreneurship strategy should support startups by improving access to capital, lowering taxes, and easing regulatory burden.
  - Government plan to rationalize business subsidies would improve product market efficiency.
  - Government encouraged to continue reviewing size and effectiveness of the R&D tax incentive.
- Geoeconomic fragmentation (staff guidance):
  - Continue concerted public-private efforts to identify critical dependencies, assess impacts of geoeconomic fragmentation, and develop risk mitigation strategies consistent with the WTO framework.
  - Denmark’s commitment to supporting multilateral and transparent trade policies is welcome.
- Climate (staff guidance reiterated):
  - Further measures needed to achieve mitigation targets and prepare for climate change.
  - Government’s decision to reduce emissions in the agriculture sector is welcome.
  - Develop implementation plan for National Climate Adaptation Plan I and update investment needs estimates for adaptation.
  - Review the property insurance scheme (“Storm Surge Scheme”) to make insurance premiums risk-based.

*Source: 1dnkea2024001-print-pdf - 31.      Denmark has stepped up efforts to  prepare for intensifying geoeconomic*

### 50.      It is recommended that the next Article IV consultation with Denmark be held in the

### 1dnkea2024001-print-pdf - 50.      It is recommended that the next Article IV consultation with Denmark be held in the

### Recommendation
- It is recommended that the next Article IV consultation with Denmark be held in the standard 12-month cycle.

### Recent economic developments
- Industrial production (Index, 2015=100): series shown Jan-18 to Apr-24 with notable components "Total", "Pharmaceuticals", and "Manufacturing excluding pharmaceutricals"; graph indicates pharmaceuticals growing strongly.
- Net exports contributions to real GDP growth (percent point): series plotted 2018–2024 showing exports and imports contributions.
- Real domestic total demand (Percent year-over-year): quarterly series through 2024Q1 showing fluctuations.
- Employment growth (Percent; year-over-year change): total and by "Construction" and "Services" with series through 2024Q1.
- Unemployment and labor force participation rate (Percent): series through 2024Q1; unemployment creeping up amid increasing participation rates.
- Business and consumer confidence (Percent balance): series Jan-18 to Apr-24 showing gradual recovery.

### Financial soundness indicators
- Capital Adequacy Ratios (Percent): CAR and Core tier 1 series 2011–2023 showing ratios remained well above regulatory requirements.
- Nonperforming Loans (Percent): series 2017–2023 showing NPLs remained low.
- Lending Margins (Percent): lending margin, households and non-financial corporations with return on assets (rhs) series through Mar-24.
- Liquid assets indicators (Percent): "Liquid assets to ST liabilities" and "Liquid assets to total assets" series 2017–2023; ratios increased slightly in 2023.
- Net FX open positions: banks exposure to FX series 2011–2023 showing net open positions were balanced in 2023.
- Loans and Deposits Growth and Loan-to-deposit ratio: series 2017–2023 showing loan-to-deposit ratio increased in 2023.

### Real estate market and household balance-sheet
- Lending Growth (Percent change, year over year): February-20 to May-24 series by lender type ("Mortgage banks to HHs", "Banks to HHs", "Mortgage banks to NFCs", "Banks to NFCs", "Total"); mortgage loans to households stopped declining while credit to non-financial corporates slowed.
- Average Mortgage Rates and House Prices (Percent, net of administration fee; index, average 2018=100): total loans and new loans series and house price indices ("Single-family houses prices - all Denmark", "Flats prices - Copenhagen") through May-24 showing lending rates declined from their peak and house prices rebounded during 2023:H2.
- Mortgage Covered Bond Markets (Outstanding amount, 2022; percent of GDP): DNK 117; other countries listed (e.g., SWE 40, NOR 24, CHE 23, ISL 22, ...).
- Ownership Shares of Danish Mortgage Bonds (Percent): series Jan-01 to May-24 showing "Credit institutions", "Other asset managers", "Insurance and pension", "Foreign", "Other".
- Household Debt as Percent of Net Disposable Income (2022 or latest): country series with DNK among the highest (DNK shown positioned near CHE, SWE, USA, JPN, etc.).
- Financial Assets (Percent of gross disposable income; 2022): components "Equity and mutual fund shares", "Currency, deposits, and other financial assets", "Pensions and insurance" with CHE highest and DNK shown among top.

### Pension and insurance sector developments
- Pension Fund Performance (Return on investments, monthly average, DKK billions): series Jan-18 to Apr-24 with a strong rebound in 2023; specific monthly value highlighted "50.1" and "57.2" at top of chart area.
- Insurance and Pension Fund Foreign Exposure Share (Percent): rest of the world share series through Apr-24; exposure to North/Central American markets accounts for over 40 percent of the total (displayed breakdown includes "North/Central America 47.3" in a detailed pie breakdown).
- Insurance and Pension Fund Asset Composition (Percent): quarterly series 2017Q1–2024Q1 showing increased allocations to "Alternative 2/Listed Shares" and shifts in composition.
- Market Rate Product Share of Insurance Provisions (Percent): quarterly series 2018Q1–2024Q1 showing Danish insurers have transferred more market risk to customers by increasing market-rate products.
- Investment by Insurance and Pension Companies (Percent of total investment): series 2018Q1–2024Q1 showing investments in equities increased in recent years.

### Labor market and education outcomes
- Labor Participation Rate: Male (Percent): comparison Denmark, EU, Top 3 EU average for age groups 15-24, 25-54, 55-64 (period 2008-2023).
- Labor Participation Rate: Female (Percent): same comparisons by age groups.
- Employment Rate by Educational Attainment (Percent; 25-54 years old; 2024Q1): Denmark, Nordics, EU, EU top 3 average by attainment ("Lower secondary level", "Post secondary level", "Tertiary level").
- Share of Population with Low Educational Attainment (Percent; 25-34 years old; 2023): Denmark compared to Nordics, EU, EU top 3 average; share is relatively high.
- Average Weekly Hours Worked by Gender (Hours; 2023): Denmark, Nordics, EU, EU top 3 average; average work hours per worker are among the lowest in the EU.
- Share of Foreign Labor Force (Percent of active population aged over 25): Denmark much lower than EU and Nordic averages (series 2010 to 2023).

### Key macroeconomic projections and fiscal indicators (Table 1 highlights)
- Real GDP: 2021 7.4; 2022 1.5; 2023 2.5; 2024 1.9; 2025 1.6; 2026 1.4; 2027 1.4; 2028 1.4; 2029 1.4.
- Final domestic demand: 2021 7.0; 2022 -1.0; 2023 -0.9; 2024 0.4; 2025 1.7; 2026 1.5; 2027 1.5; 2028 1.5; 2029 1.5.
- Private consumption: 2021 6.8; 2022 -2.1; 2023 1.4; 2024 1.8; 2025 1.8; 2026 1.7; 2027 1.6; 2028 1.6; 2029 1.6.
- Gross national saving (percent of GDP): 2021 32.3; 2022 36.4; 2023 32.7; 2024 31.0; 2025 31.0; 2026 30.7; 2027 30.5; 2028 30.3; 2029 30.1.
- Gross domestic investment (percent of GDP): 2021 23.6; 2022 24.7; 2023 22.8; 2024 21.9; 2025 21.7; 2026 21.7; 2027 21.7; 2028 21.8; 2029 21.8.
- Potential output (percent): 2021 2.3; 2022 2.3; 2023 2.2; 2024 2.0; 2025 2.0; 2026 1.8; 2027 1.6; 2028 1.4; 2029 1.6.
- Output gap (percent of potential output): 2021 1.2; 2022 0.5; 2023 0.7; 2024 0.7; 2025 0.4; 2026 0.1; 2027 -0.1; 2028 -0.1; 2029 -0.2.
- Harmonized unemployment rate (percent): 2021 3.6; 2022 2.5; 2023 2.8; 2024 2.9; 2025 3.0; 2026 3.0; 2027 3.0; 2028 3.0; 2029 3.0.
- HICP (year average): 2021 1.9; 2022 8.5; 2023 3.4; 2024 1.8; 2025 2.2; 2026 2.0; 2027 2.0; 2028 2.0; 2029 2.0.
- Overall balance (percent of GDP): 2021 4.1; 2022 3.4; 2023 3.3; 2024 1.8; 2025 0.9; 2026 0.4; 2027 0.3; 2028 0.1; 2029 -0.1.
- Gross debt (percent of GDP): 2021 35.8; 2022 29.7; 2023 29.7; 2024 28.2; 2025 27.3; 2026 27.1; 2027 27.1; 2028 27.1; 2029 27.3.
- Nominal GDP (Bln DKK) memorandum: 2021 2,568; 2022 2,844; 2023 2,805; 2024 2,842; 2025 2,964; 2026 3,067; 2027 3,171; 2028 3,281; 2029 3,395.

### General government operations (Tables 2–3 highlights)
- Total revenues (Billions of DKr): 2021 1,374.3; 2022 1,374.8; 2023 1,406.3; 2024 1,408.6; 2025 1,447.7; 2026 1,494.6; 2027 1,549.8; 2028 1,605.5; 2029 1,661.5.
- Total expenditures (Billions of DKr): 2021 1,269.1; 2022 1,276.9; 2023 1,313.5; 2024 1,357.6; 2025 1,422.1; 2026 1,481.5; 2027 1,541.0; 2028 1,601.0; 2029 1,663.4.
- Net Lending/Borrowing (Billions of DKr): 2021 105.2; 2022 97.9; 2023 92.7; 2024 51.0; 2025 25.6; 2026 13.1; 2027 8.7; 2028 4.5; 2029 -1.9.
- Total revenues (percent of GDP): 2021 53.5; 2022 48.3; 2023 50.1; 2024 49.6; 2025 48.8; 2026 48.7; 2027 48.9; 2028 48.9; 2029 48.9.
- Total expenditures (percent of GDP): 2021 49.4; 2022 44.9; 2023 46.8; 2024 47.8; 2025 48.0; 2026 48.3; 2027 48.6; 2028 48.8; 2029 49.0.
- Primary balance (percent of GDP): 2021 3.7; 2022 3.1; 2023 2.5; 2024 1.1; 2025 0.1; 2026 -0.5; 2027 -0.7; 2028 -0.9; 2029 -1.1.
- Structural balance (percent of potential GDP): 2021 -0.3; 2022 1.7; 2023 1.7; 2024 1.2; 2025 0.8; 2026 0.4; 2027 0.3; 2028 0.1; 2029 -0.1.

### External sector and balance of payments (Tables 6–7 highlights)
- Current account (Billions of DKK): 2021 222.8; 2022 331.6; 2023 275.9; 2024 257.1; 2025 275.8; 2026 276.2; 2027 277.5; 2028 280.2; 2029 283.3.
- Current account (percent of GDP): 2021 8.7; 2022 11.7; 2023 9.8; 2024 9.0; 2025 9.3; 2026 9.0; 2027 8.8; 2028 8.5; 2029 8.3.
- Balance on goods (Billions of DKK): 2021 85.0; 2022 78.4; 2023 208.3; 2024 267.6; 2025 283.7; 2026 286.3; 2027 290.3; 2028 295.9; 2029 302.0.
- Exports of goods & services (percent of GDP): 2021 58.8; 2022 70.5; 2023 68.0; 2024 68.9; 2025 69.4; 2026 69.1; 2027 68.8; 2028 68.6; 2029 68.4.
- Financial account (Billions of DKK): 2021 278.6; 2022 334.1; 2023 205.7; 2024 246.9; 2025 265.2; 2026 265.2; 2027 266.1; 2028 268.5; 2029 271.2.
- International Investment Position (Billions of DKK, Table 7 assets): 2021 9,230; 2022 10,049; 2023 10,214; 2023 total assets 10,380 (table entries across 2015–2023).

*International Monetary Fund staff compilation from the provided pages.*

### Annex I. The Danish Pharmaceutical Sector and Its

### Annex I. The Danish Pharmaceutical Sector and Its Macroeconomic Implications

### Overview and Key Developments
- Pharmaceutical production has more than doubled over the past two years. This reflects the success of a leading company, Novo Nordisk, in developing new diabetes and obesity drugs.
- The bulk of the pharmaceutical production takes place abroad under Danish ownership in the form of “merchanting and processing.” Accordingly, the pharmaceutical industry’s impact on the domestic economy is relatively limited.

### Sectoral Contributions and Key Statistics
- Trade
  - Pharmaceutical exports accounted for 24 percent of total goods export in 2023, up from 18 percent a decade ago.
  - However, most of the exports don’t cross the border as these are produced abroad under merchanting and processing.
- Employment
  - The pharmaceutical sector’s direct contribution to employment remains small at less than one percent of total employment.
- Investment
  - Novo Nordisk plans to invest DKr 42 billion (1.7 percent of GDP) over the next five years.
- Fiscal
  - Novo Nordisk paid DKr 16 billion in corporate tax in 2023, which is equivalent to 0.7 percent of GDP and represents 15 percent of the total corporate tax revenue.

- Table-style indicators (2013 → 2023 as presented)
  - Gross value added (% of total): 2.9 → 6.7
  - Exports (% of total exports): 10.4 → 11.9
  - Exports (% of GDP): 5.7 → 8.2
  - Employment (Thousand persons): 19.0 → 29.0 1/
  - Employment (% of total): 0.7 → 0.9 1/
  - Investment in Denmark (2023-28) (% of GDP): ... → 1.7
  - Tax payment (% of GDP): ... → 0.7
  - Tax payment (% of total income tax): ... → 2.0
  - Tax payment (% of total corp. income tax): ... → 15.3
  - Sources: Danmarks Statistik, Haver Analytics, and Novo Nordisk
  - 1/ Data for 2022.
  - 2/ Refers to Novo Nordisk.

### Implications for Measuring Capacity Pressures
- The increase in merchanting and processing (M&P) activities (e.g., in pharmaceuticals) with limited domestic resource use poses questions about the usefulness of GDP-based output gap measures for assessing capacity pressures. This is because M&P-driven changes in the output gap may not accurately indicate changes in capacity pressures in Denmark.
- Alternative approach: calculating the output gap by excluding industries heavily reliant on M&P activities (like pharmaceuticals). Caveat: this may not be suitable because production factors are mobile across sectors and these industries still have some footprint (e.g., headquarters functions and R&D activities) in Denmark.

### Employment Gap and Complementary Indicators
- The employment gap, the difference between the actual employment and the structural employment (consistent with zero capacity pressure), may offer a complementary measure of capacity pressures.
- Structural employment is not directly observable, subjecting estimates of the employment gap to considerable uncertainty. Example: the increase in immigration in Denmark adds to the estimation challenge, as it is highly uncertain how much of the increase in labor supply from the immigrants is permanent.
- To obtain an accurate reading of capacity pressures, it is important to consider a broader set of indicators. These include:
  - the output gap,
  - the employment gap,
  - labor market indicators,
  - wage indicators,
  - price indicators.

*Source: Annex I. The Danish Pharmaceutical Sector and Its Macroeconomic Implications (from the provided IMF content).*

### Annex V. Debt Sustainability Analysis

### Annex V. Debt Sustainability Analysis

### DSA summary assessment and outlook
- Overall risk of sovereign stress: Low.
- Debt sustainability: Debt is sustainable.
- Fiscal balances:
  - Remained in surplus in recent years.
  - Projected to weaken to a small deficit over the medium term, broadly consistent with the MTO set for 2030.
- Debt dynamics:
  - Debt-to-GDP ratio is projected to remain around 30 percent in the medium term.
  - Debt stabilization in the baseline: No.
- Liquidity and financeability:
  - Liquidity risks as analyzed by the GFN Financeability Module: Low.
- Long-term fiscal risks:
  - Assessed as Low.
  - Demographic-related expenditures are projected to increase by 1 percent of GDP by 2040.
  - Health-care and long-term care expenditure is the main driver.
  - Pension expenditures will be contained by the indexation of statutory retirement age to life expectancy.
- Policy guidance:
  - Over the longer run, the government should continue to closely monitor long-term fiscal pressures and identify additional fiscal adjustment measures as necessary.

### Coverage, consolidation, and reporting notes
- Debt coverage in the DSA: CGG GNFPSCPSOther (as presented in figure header).
- Subsections included in the chosen coverage:
  - Budgetary central government: Yes
  - Extra budgetary funds (EBFs): Yes
  - Social security funds (SSFs): Yes
  - State governments: No
  - Local governments: Yes
  - Public nonfinancial corporations: No
  - Central bank: Yes
  - Other public financial corporations: No
- Commentary: Denmark does not have state governments.

### Methodological and publication notes
- Note on risk of sovereign stress: It is a broader concept than debt sustainability; unsustainable debt can only be resolved through exceptional measures (such as debt restructuring), while sovereign stress can be remedied by measures that do not involve debt restructuring (such as fiscal adjustment and new financing).
- Near-term assessment: "The near-term assessment is not applicable in cases where there is a disbursing IMF arrangement. In surveillance-only cases or in cases with precautionary IMF arrangements, the near-term assessment is performed but not published."
- DSA optionality and publication qualifiers: "A debt sustainability assessment is optional for surveillance-only cases and mandatory in cases where there is a Fund arrangement. The mechanical signal of the debt sustainability assessment is deleted before publication. In surveillance-only cases or cases with IMF arrangements with normal access, the qualifier indicating probability of sustainable debt ("with high probability" or "but not with high probability") is deleted before publication."

### Medium-term and long-term risk analysis (summarized)
- Medium-term risks: Low.
- Long-term risks: Low.
- Commentary: Long-term risks from large amortizations are not observed.

---

### Annex VII. Geoeconomic Fragmentation and Trade in Denmark

### Context and definitions
- Geoeconomic fragmentation (GEF): A policy-induced shift towards deglobalization involving systematic disconnection of trade and investment between nations; trend accelerated since 2020 and largely spurred by national security considerations.
- Total Foreign Production Exposure (FPE): An alternative trade metric that traces every sequence of input-to-input and captures both direct and indirect inputs through trade; based on the Leontief gross trade matrix calculated from the OECD country input-output table.

### Denmark’s vulnerability and structural features
- Trade openness:
  - Trade in goods (sum of exports and imports) exceeded 70 percent of GDP by 2023.
- Economic concentration:
  - Top ten multinational enterprises (ranked by asset size) account for nearly 80 percent of the total assets of all publicly listed Danish firms.
- Exposures:
  - Because China is Denmark's major trading partner among non-aligned countries (“the other bloc”), the annex uses Denmark’s trade exposure to China as an example of GEF risks.

### Findings from conventional versus FPE metrics
- Conventional metric (share of intermediate imports in total intermediate imports):
  - Manufacturing: increased from 0.1 percent in 1995 to 1.9 percent in 2022.
  - High-tech sector: increased from 0.2 percent in 1995 to 1.6 percent in 2022.
  - Interpretation: Conventional metric indicates Denmark’s dependence on Chinese intermediate imports is not significant.
- Total Foreign Production Exposure (FPE) results:
  - Manufacturing: FPE to Chinese inputs increased by 8 percentage points to 9 percent.
  - High-tech sector: FPE to Chinese inputs increased by 2.5 percentage points to 4.5 percent.
  - Interpretation: FPE shows a more pronounced increase and larger levels of exposure than the conventional metric, highlighting deeper integration of Chinese inputs into Danish supply chains.

### Projected economic impact under a moderate global fragmentation scenario
- Estimated GDP impact on Denmark: between -0.9 and -1.0 percent of GDP (range reported).

### Policy implication
- Recommendation: Denmark should continue preparing for the intensification of GEF risks.

*Source: Fund staff.*

### 5.      The increase in Denmark’s FPE in the manufacturing and high-tech sectors to China

### 5. The increase in Denmark’s FPE in the manufacturing and high-tech sectors to China

### Key findings on Foreign Production Exposure (FPE) trends
- Over the past two decades, Denmark’s FPE to China in the manufacturing and high-tech sectors has increased notably, while FPE to other major trading partners has declined.
- Denmark’s FPE to Top 13 Countries is illustrated by comparisons for 1995 and 2020:
  - In the manufacturing sector, Denmark’s FPE to China was very small in 1995, but by 2020 China’s ranking had risen to the second position.
  - Denmark’s FPE to Germany remained the highest in 2020, but the size of its FPE had decreased between 1995 and 2020.
  - Denmark’s FPE to Sweden, the United Kingdom, and France fell notably between 1995 and 2020.
- In the high-tech sector, Denmark’s FPE to China has not exceeded that of major trading partners like Germany, Sweden, the United Kingdom, and the United States, although Denmark’s dependence on China has grown significantly.

### Implications and policy recommendations on geoeconomic fragmentation (GEF) risks
- Denmark should continue preparing for intensifying GEF risks with policy measures.
- Institutional step taken:
  - The authorities established the “Business Forum for Global Risks” in 2023 to help prepare a globalization strategy for Danish businesses.
- Objectives of the globalization strategy:
  - Support Danish companies’ competitiveness.
  - Offer policy recommendations to reduce vulnerability to global risks.
- Recommended continued actions:
  - Continued joint efforts by the public and private sectors to identify critical dependencies.
  - Evaluate the effects of GEF scenarios.
  - Develop risk mitigation strategies with close coordination at the EU level and in alignment with the WTO framework.
- Possible complementary measures:
  - Structural reforms that address labor shortages and skill mismatches.
  - Measures to enhance technological developments and innovation.

### Methodology and interpretation of FPE (Annex VII. Box 1)
- The FPE traces every sequence of input to input, providing a more accurate perspective on foreign trade dependencies evaluated on a gross production basis.
- It provides a comprehensive evaluation of the extent to which a country is influenced by foreign production, considering both direct and indirect effects.
- Total foreign production exposure is based on the Leontief gross trade matrix calculated from the OECD country input-output table.
- Illustration and interpretation:
  - An illustrative table (two nations A and B with two sectors each) connects sectoral gross output (X) to the requirements for producing goods, showing gross output calculated by the sum of sales of intermediate goods (T) and services, and the sale of final goods and services (F).
  - Based on the methodology developed by Baldwin et al. (2022), the FPE represents the required amount of total gross output from any source-country to produce an additional 1 dollar in any sector of the destination-country.
  - The metric measures the extent to which, for example, importing sector 1 in nation B relies on inputs from sector 2 in nation A — indicating the additional intermediate inputs that sector 1 in nation B would require from sector 2 in nation A to increase its output by one dollar.

*Source: IMF staff compilation from chapter 5 and Annex VII of the provided Denmark country report content.*

### Annex IX. Figure 3. Denmark: Table of Common Indicators Required for Surveillance

### Annex IX. Figure 3. Denmark: Table of Common Indicators Required for Surveillance

### External and institutional indicators
- Membership Status: Joined: March 30, 1946; Article VIII.
- Article IV Consultation: The last Article IV consultation was concluded by the Executive Board on June 16, 2023. The staff report (IMF Country Report No. 23/227) was published with Press Release No. 23/236 (June 26, 2023).
- Exchange Rate Arrangements:
  - Currency: Danish krone.
  - De jure and de facto exchange rate arrangement: conventional pegged arrangement.
  - Formal framework: European Exchange Rate Mechanism (ERM II).
  - Central rate: DKr 746.038 per 100 euro.
  - Standard width of fluctuation band in ERM II: +/-15 percent.
  - Agreed narrower fluctuation band: +/-  2.25 percent.
  - Resulting permitted krone range: DKr 762.824 per 100 euro and DKr 729.252 per 100 euro.
- Data provision and publication: Publication under the Data Standards Initiatives through the National Summary Data Page.

- IMF quota and related balances (SDR Million; Percent):
  - Quota 3,439.40 100.00
  - Fund holdings of currency (Exchange Rate) 2,535.04 73.71
  - Reserve Tranche Position 904.37  26.29

- SDR Department (SDR Million; Percent Allocation):
  - Net cumulative allocation 4,827.98 100.00
  - Holdings 5,045.73 104.51

- Outstanding Purchases and Loans: None
- Latest Financial Commitments: None
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs):
  - Charges/Interest: 0.04 (2025), 0.04 (2026), 0.04 (2027), 0.04 (2028)
  - Principal: ... ... ... ...
  - Total: 0.04 (2025), 0.04 (2026), 0.04 (2027), 0.04 (2028)

### Recent macroeconomic developments and outlook
- Recent data (as of statement dated September 6, 2024):
  - Preliminary GDP estimate for 2024:Q2: growth of 0.6 percent (quarter over quarter), largely driven by pharmaceutical exports.
  - 2024:Q1 GDP growth rate revised to -1.0 percent, up from -1.4 percent, due to upward revisions in public consumption and gross fixed capital formation.
  - Headline inflation: 1.0 percent (year on year) in July, down from 1.8 percent in June, primarily due to base effects.
  - Month-on-month inflation (seasonally adjusted): 0.5 percent in July, up from 0.1 percent in June.
- Staff appraisal: Latest data are consistent with staff’s forecasts of GDP growth and inflation in 2024.
- Outlook and risks:
  - Growth drivers: export growth (especially pharmaceuticals); recovery in domestic demand in 2024 and 2025 propelled by higher real wages, high employment, and less tight fiscal policies.
  - Risks: upside risks to inflation and interest rates; weaker-than-expected growth in export markets due to geopolitical tensions, Russia’s war against Ukraine, and fragmentation of international trade; domestic households may be less eager to increase spending than expected.
  - Upside scenario: stronger-than-expected domestic demand could add to labor market pressures.
  - Policy stance: Denmark remains committed to free-trade policies within the multilateral and rules-based trading system.

### Fiscal policy
- Framework and targets:
  - Forward-looking fiscal framework with an operational target for the medium-term structural budget balance and overarching objective of long-term fiscal sustainability.
  - 2030-plan (November 2023) aims at a structural budget deficit of 0.5 percent of GDP in 2030.
  - Budget Law deficit limit: -1 percent of GDP.
- Current position:
  - Structural budget balance in 2024: 0.6 percent of GDP (considerably above the target for 2030 and above the deficit limit of -1 percent of GDP).
  - Public finances: low public gross debt and public net financial wealth position positive since 2018.
- Near-term policy:
  - Fiscal policy tightened substantially in 2022 and 2023 due to high capacity pressures.
  - Outlook allows for a gradual easing of fiscal policy in 2024 and 2025.
  - In 2025, fiscal policy is expected to stimulate demand growth with a positive one-year fiscal effect.
  - Overall multi-year fiscal effects since before Covid are estimated to have a net dampening impact on economic activity; structural budget balance remains above its medium-term target.
- Military spending:
  - Increased to 2 percent of GDP and is planned to exceed that level this year and next, including to provide continued support for Ukraine after Russia’s invasion.

### Financial sector and real estate markets
- Overall assessment: Financial sector sound and resilient, though risks from higher interest rates persist.
- Banking sector:
  - Banks have sufficient capital and liquidity buffers; earnings are high.
  - Impairments and the NPL-ratio remain low.
  - Higher interest rates have loosened the squeeze on banks’ margins, improving profitability in the short term, but tighten financial conditions for households and businesses with potential longer-term effects on profitability.
- Commercial real estate (CRE) and housing:
  - Transactions in CRE markets have plummeted, complicating price assessment.
  - From Q1 2022 to Q1 2023, house prices declined by nearly 7 percent in nominal terms; since the beginning of 2023, prices have been gradually increasing again.
  - Risks from prolonged higher interest rates and recognition of losses for real estate companies could have implications for the economy and banks.
  - Policy response: introduction of a sector-specific systemic risk buffer to strengthen banking sector resilience to CRE-related shocks.
- Macroprudential and borrower-based measures:
  - Danmarks Nationalbank (DN) finds that tighter borrower-based measures would enhance financial system resilience and could stabilize housing prices.
  - DN recommends introducing a legal basis for binding borrower-based measures and lowering the tax deductibility of interest expenses.
  - Ministries express concern that such measures could adversely affect the housing market and households’ ability to repay more expensive loans first and to smooth consumption; further analysis is needed before additional measures.
- Non-bank financial institutions (NBFIs):
  - NBFI sector has grown markedly, but in Denmark NBFIs do not have significant direct credit exposures.
  - Insurance and pension firms have ample capital buffers.
  - Large NBFI balances can influence financial market stability in a pro-cyclical way, but significant share of non-guaranteed market-return products shifts risk to customers.
  - Most investment funds are closed-ended, which reduces liquidity risks markedly.

### Productivity, labor supply, and structural reforms
- Reforms enacted and planned:
  - Wide-ranging reforms to retirement rules, labor market policies, and taxation have increased labor supply over past decades.
  - Recent government reforms expected to increase structural employment by more than 1 percent (29,000 FTEs) by 2030, including an income tax reform, an education reform of the master’s program, changes to student grants, and supplemental pay-scheme changes for international workers.
  - Government aims to further increase structural employment by a total of 45,000 FTEs by 2030.
- Policy priorities: Continued focus on reforms to strengthen labor supply and enhance productivity, given a declining working-age population and increasing age-related expenses that will put pressure on public finances in coming decades.

### Climate policy and green transition
- Climate and emissions targets:
  - Climate Act (2020): legally binds the government to reduce greenhouse gas emissions by 70 percent relative to 1990 levels by 2030, with the goal of achieving climate neutrality by 2045.
- Green Tax Reform (2022):
  - Introduces more harmonized CO2 taxes for the industrial sector from 2025.
  - Includes significant support for investments in the green transition.
- Agreement on a Green Denmark (June 2024):
  - Framework for reducing greenhouse gas emissions in the agri-food sector.
  - A CO2e tax on livestock will be introduced in phases from 2030.
  - Measures to increase afforestation and improve nature, biodiversity, aquatic environment, and drinking water.
  - Establishment of the Green Area Fund of approximately DKK 40 billion (EUR 5.4 billion) to support afforestation, rewetting of drained peatlands in agricultural use, strategic land acquisitions, and managing nitrogen reductions.
  - Target to change 15 percent of existing agricultural area to forests, rewetted areas, etc.

*Annex IX. Figure 3. Denmark: Table of Common Indicators Required for Surveillance (As of July 3, 2024).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1dnkea2024001-print-pdf.pdf_