## 1dnkea2025001-print-pdf ## Source details **Canonical URL:** [1dnkea2025001-print-pdf](https://www.imf.org/-/media/files/publications/cr/2025/english/1dnkea2025001-print-pdf.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2025/english/1dnkea2025001-print-pdf.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2025/english/1dnkea2025001-print-pdf.pdf.json) --- ### Context and recent macroeconomic developments - Growth drivers: - Denmark’s GDP grew 3.7 percent in 2024, up from 2.5 percent in 2023. - The exceptional pharmaceutical boom—more than 2.3-fold increase in pharmaceutical gross value added (in constant prices) over the past three years—has driven overall growth. - Output growth accelerated from 3.4 percent year-on-year (y/y) in 2024:H1 to 3.9 percent in H2. - In 2025:Q1, GDP rose by 3.6 percent y/y; seasonally adjusted quarter-on-quarter GDP fell by 0.5 percent. - Demand composition: - Domestic demand remained relatively sluggish; private consumption weak despite lower inflation and improving real disposable income. - Gross capital formation picked up, driven by intellectual property rights and transport equipment; other business investment subdued. - Inflation and wages: - Headline HICP was 1.5 percent y/y in April, down from 1.8 percent y/y at the end of 2024. - Core inflation (HICP excluding energy and processed food) around 1.4–1.8 percent in recent months. - Nominal wage growth accelerated through mid-2024 after collective bargaining agreements but has since decelerated; wage growth: real wages for public and private sector workers continued to recover. - Labor market: - Employment continued to grow moderately with increased participation from foreign and older workers. - Unemployment rate stabilized at 2.9 percent. - Job vacancy rates returned to pre-pandemic levels across most sectors. - Fiscal and external positions: - Overall fiscal position in surplus since 2017; surplus of 4.5 percent of GDP in 2024, exceeding forecast of 1.7 percent. - Structural surplus increased by ¼ percentage point of potential GDP in 2024. - Gross debt decreased from 34 percent of GDP at end-2023 to 31 percent at end-2024. - Current account surplus widened to 12 percent of GDP in 2024, up from 11 percent in 2023. - Goods trade surplus increased from 7½ percent in 2023 to 9¼ percent of GDP in 2024; services trade surplus narrowed from 1½ percent in 2023 to ¾ percent of GDP in 2024. - Monetary and financial conditions: - Objective: fixed exchange rate against the euro via ERM II. - Since June 2024, Danmarks Nationalbank cut policy interest rates eight times for a total of 200 basis points. - Credit growth picked up to around 3 percent y/y; household lending recently strengthening. - Non-performing loans around 2½ percent; return on equity at 12 percent at end-2024. - Tier 1 capital to risk-weighted assets ratio at 20.4 percent at end-2024; leverage ratio around 4½ percent. - Risks remain in real estate markets, mortgage lending, nonbank financial institutions (NBFIs), and cyber threats. ### Outlook, baseline projections, and key scenarios - Baseline growth and inflation: - Output growth projected to moderate from 3.7 percent in 2024 to 3.0 percent in 2025 and to 1.8 percent in 2026. - Inflation expected to stay around 2 percent. - Wage growth expected to moderate to around 3½ percent, down from 4 percent in 2024. - U.S. accounted for about 17½ percent of total exports and 12 percent of GDP in 2024. - Defense spending and fiscal impact: - Authorities announced a DKK 25 billion (¾ percent of GDP) increase in defense spending for 2025 and 2026, followed by DKK 10 billion per year through 2033. - Defense spending will temporarily rise from 2½ percent of GDP in 2024 to 3¼ percent in 2025 and 2026 before returning to 2¼ percent by 2033. - Overall surplus projected to fall from 4½ percent of GDP in 2024 to 1¼ percent in 2025, and further to ½ percent in 2026. - Fiscal stance in 2025 is expansionary, with a structural balance change of –½ percent of potential GDP (excluding additional defense budget). - Staff estimates growth impact of a structural balance easing of ½ percentage points of GDP at about 0.1 percent, using fiscal multipliers of 0.2–0.3. - Downside illustrative scenario (April 2025 WEO illustrative scenario) — projected impacts relative to WEO reference: - Global: global GDP lowered by 1.3 percentage points by 2025 and 1.9 percentage points by 2026; euro area GDP reduced by 1 percentage point by 2025 and 1.8 percentage points by 2026. - Denmark: real GDP level could be 1.6 percentage points below staff’s baseline in 2026; annual GDP growth rate would be 1.1 percent in 2026 versus 1.8 percent in the baseline. - Policy guidance under this scenario: discretionary fiscal stimulus not deemed necessary; allow automatic stabilizers to fully operate; ECB may consider easing monetary policy, with DN following under the fixed exchange regime. ### Key vulnerabilities and risk assessment - External risks (dominant): - higher trade barriers and sanctions; intensification of regional conflicts; deepening geoeconomic fragmentation; larger-than-expected slowdown in the global economy. - changes to U.S. drug price policies may negatively impact Danish pharmaceutical firms exposed to the U.S. market. - Domestic risks: - labor supply and skills shortages amid a declining working-age population; - higher-than-expected defense spending allocated to manpower could pressure labor market, leading to higher wages and inflation; - cyberattacks or misuse of AI. - Financial sector risks: - Household sector: rising debt service costs, refinancing of fixed- and low-interest mortgages to variable rates, some deferred amortization; about 23 percent of new mortgages extended to borrowers with loan-to-value ratio above 90 percent and about 21 percent to those with debt-to-income ratio above four in 2024:Q4. - Real estate: residential prices slightly overvalued; CRE exposures account for about 40 percent of total corporate lending; CRE lending growth by systemically important banks around 6 percent y/y in 2024:Q4. - NBFIs: pension and insurance sector assets around 200 percent of GDP; exposure to market and liquidity risks. - Risk matrix highlights: - Trade policy and investment shocks: likelihood "High", impact "High". - Deepening geoeconomic fragmentation: likelihood "High", impact "High". - Cyberthreats: likelihood "Medium", impact "Medium". - Weaker domestic demand: likelihood "Medium", impact "Medium". ### Financial sector stress testing, macroprudential stance, and supervisory recommendations - Severe recession stress parameters (three-year accumulated changes and level changes): - GDP: 6.2 percent over three years. - Unemployment: increases by 7.1 percentage points. - House prices: fall by 25.9 percent. - Liquidity stress test design: - Assesses excess liquidity under assumptions on maturity of term deposits and market funding, withdrawals from committed facilities and demand deposits, and realization value of liquidity buffer assets. - In severe recession scenario, it is assumed the countercyclical capital buffer will be released, raising excess capital levels. - Current macroprudential settings and recommendations: - Countercyclical capital buffer (CCyB): 2.5 percent (recommendation: keep at 2.5 percent). - Sector-specific systemic risk buffer for CRE: 7 percent (introduced in June 2024) (recommendation: keep at 7 percent). - If downside risks materialize and credit constraints bind, authorities could consider lowering the CCyB rate. - Borrower-based measures: recommend considering lowering maximum loan-to-value ratio below current 95 percent and reducing tax deductibility of mortgage interest expenses to deter larger mortgages. - Supervisory and regulatory priorities: - Review IFRS 9 modeling practices and credit risk modeling (including probability of default modeling) and incorporate forward-looking information; remedial actions as necessary. - Complete review of internal ratings-based models in line with European Banking Authority guidelines, focusing on residential and commercial real estate portfolios. - Implement EU CRR III/CRD VI banking package, including the output floor, as planned. - Continue the joint Nordic-Baltic banking stress testing exercise to analyze cross-border exposures and linkages. - Ensure DFSA has adequate staffing and resources; review and increase DFSA budget as necessary. - Strengthen oversight framework for NBFIs; finalize supervisory order on stress testing framework for insurance and pension firms and integrate into supervisory policy. - Improve AML/CFT: update the national risk assessment by the end of this year (as planned). ### Structural reforms, labor supply, digitalization, and climate policy - Potential growth: - Staff expects potential growth to decelerate to around 1½ percent by 2030. - Medium-term growth projected at around 1.5 percent, reflecting maturing pharmaceutical sector and declining working-age population. - Labor market and skills measures: - Make Active Labor Market Policies (ALMPs) more cost-effective: Denmark’s spending on ALMPs is at two percent of GDP; planned rationalization to reduce costs by 0.1 percent of GDP. - Continue assessing foreign worker recruitment schemes and integration program effectiveness. - Enhance vocational education and training; implement "Prepared for the Future VII" to reduce dropout rates and attract youth. - Address sectoral skills gaps in ICT, health, long-term care, digital, AI, and green transitions. - Digitalization and AI: - Denmark’s AI Preparedness Index (AIPI) score: 0.78. - Launched first AI supercomputer in October 2024. - Planned curriculum revision to strengthen digital education; December 2024 strategic approach to adopt AI in the public sector. - Entrepreneurship measures: increase R&D tax deduction from 108 percent to 120 percent by 2028; new entrepreneurship strategy to improve access to capital, lower taxes, and ease regulatory burden. - Energy and climate: - Full reopening of Tyra oil and gas field will make Denmark a net gas exporter. - Target: 100 percent renewable electricity consumption by 2028. - Plans to build hydrogen pipeline to export green hydrogen to Germany. - Denmark on track to meet national target of 70 percent reduction of GHG emissions compared with 1990 by 2030. - Climate adaptation: National Climate Adaptation Plan II focuses on coastal and groundwater protection, urban flood management, and infrastructure financing responsibilities; recommendation to update investment needs and make Storm Surge Scheme premiums risk-based. - Fiscal structural measures to uphold sustainability: - Government decision to gradually raise retirement age to 70 years for those born after 1970, up from 67 years. - In staff’s baseline, structural balance will stay above the -1 percent of GDP floor over the medium term. - If adjustment required, priority given to growth-friendly spending measures; conduct in-depth expenditure reviews; implement expert committee recommendations on active labor market policies and business subsidies; enhance public administration efficiency leveraging digitalization and AI. ### External sector assessment and policy implications - External position: - Current account surplus: 12.1 percent of GDP in 2024. - NIIP rose to 78 percent of GDP in 2024; gross liabilities 294 percent of GDP; gross external debt 129 percent of GDP. - Assets: 11,035 (2024, Billions of DKK); Liabilities: 8,717 (2024, Billions of DKK); Net Investment Position: 2,318 (2024, Billions of DKK). - CA (billions of DKK): 316.1 (2022), 306.8 (2023), 356.9 (2024). - Assessment and adjustments: - Adjusted CA estimated at 11.5 percent of GDP after accounting for valuation losses (0.4 percent of GDP) and retained earnings (0.5 percent of GDP). - EBA CA norm estimated at 5.9 percent of GDP (of which 4.1 percent attributed to policy gaps); CA gap estimated at 5.6 percent of GDP. - Staff notes external position in 2024 substantially stronger than implied by medium-term fundamentals and desirable policies. - Potential policy response: decline in public sector savings and structural policies to raise investment (including in climate) would help reduce the large current account surplus. - Exchange rate and reserves: - ERM II central rate: DKr 746.038 per 100 euro. - Permissible krone range with agreed +/- 2.25 percent narrower band: between DKr 762.824 and DKr 729.252 per 100 euro. - International reserves increased by DKr23 billion in 2024, reaching DKr679 billion in December 2024 (equivalent to about 23 percent of GDP and 3.9 months of imports). - DN has not intervened in FX since February 2023. ### Implementation status of past IMF recommendations and authorities’ views - Fiscal policy (2024 Article IV advice): - Short-term: avoid adding to capacity pressures; fiscal stance was tight in 2024 with structural surplus increased. - Implementation: ongoing actions on National Climate Adaptation Plan I implementation and investment needs update. - Financial sector recommendations: - Borrower-based measures recommended in 2024: status "There are no plans to implement these measures." - Bridge data gaps for CRE vulnerability assessment: status "Ongoing." - Integrate stress testing for insurance and pension firms and develop systemic risk assessment for banks and NBFIs: status "Ongoing." - Authorities broadly concur with staff’s assessment: - Growth expected to moderate; inflation and wage pressures contained. - Ministries accept macroprudential capital settings (2.5 percent CCyB and 7 percent CRE buffer) and see value in tightening borrower-based measures, while noting housing market impacts and tax symmetry considerations. - Authorities committed to long-term fiscal sustainability and to updating AML/CFT and supervisory frameworks. *Source: 1dnkea2025001-print-pdf* ### 1. A Downside Scenario __________________________________________________________________________ 11 ### 1. A Downside Scenario ### Context - The exceptional pharmaceutical boom has continued to drive overall growth. - Denmark’s GDP grew 3.7 percent in 2024, up from 2.5 percent in 2023. - Pharmaceuticals have continued to thrive, while the rest of the economy was relatively sluggish, reflecting lackluster domestic demand. - Inflation has stayed below 2 percent. - Public finances are among the strongest in Europe; external positions remain solid; and the financial system has demonstrated resilience to multiple shocks in recent years. - Key domestic challenges: securing an adequate labor supply with the right skills amid a declining working-age population, maintaining fiscal buffers in light of anticipated higher defense spending, and navigating climate change. - Political context: centrist coalition government prioritizing green policies, labor, taxation, immigration, and more recently defense and Greenland. Next election scheduled for no later than the end of October 2026. ### Recent Developments - Growth and demand - Output growth accelerated from 3.4 percent year-on-year (y/y) in 2024:H1 to 3.9 percent in H2, driven by strong exports, particularly in pharmaceuticals. - Domestic demand picked up slightly but overall remained sluggish. - In 2025:Q1, GDP rose by 3.6 percent y/y; seasonally adjusted quarter-on-quarter GDP fell by 0.5 percent due to a decline in pharmaceuticals and persistently weak domestic demand. - Private consumption was weak despite lower inflation and improving real disposable income. - Gross capital formation picked up, driven by intellectual property rights and transport equipment; other business investment was subdued. - The extraordinary boom in the pharmaceutical sector has been largely attributed to increased demand for weight-loss drugs in the United States, leading to a more than 2.3-fold increase in pharmaceutical gross value added (in constant prices) over the past three years. - Inflation and wages - Headline HICP was 1.5 percent y/y in April, down from 1.8 percent y/y at the end of 2024. - Core inflation (HICP excluding energy and processed food) has remained around 1.4–1.8 percent in recent months. - Nominal wage growth accelerated through mid-2024 following collective bargaining agreements but has since decelerated. - Wage growth: real wages for public and private sector workers continued to recover. - Labor market - Employment continued to grow at a moderate pace with increased participation from foreign and older workers. - Unemployment rate stabilized at 2.9 percent. - Fewer firms report labor shortages as a limiting factor; job vacancy rates returned to pre-pandemic levels across most sectors. - Fiscal outcomes - Overall fiscal position in surplus since 2017; surplus of 4.5 percent of GDP in 2024, exceeding the forecast of 1.7 percent. - Revenue collections exceeded expectations, especially from personal and corporate income taxes and the pension return tax. - Expenditures rose due to increased public consumption and investment, including defense, but remained broadly aligned with forecasts. - Structural surplus increased by ¼ percentage point of potential GDP in 2024. - Gross debt decreased from 34 percent of GDP at end-2023 to 31 percent at end-2024. - Monetary policy and exchange-rate policy - Objective: fixed exchange rate against the euro via ERM II. - Since June 2024, Danmarks Nationalbank cut policy interest rates eight times for a total of 200 basis points. - Monetary policy stance has eased though real interest rates remain above the historical average. - Since February 2023, the Danish krone has fluctuated around the ERM II central rate without market intervention by the central bank. - Financial conditions and banking sector - Financial conditions have eased but remain tighter than pre-mid-2022. - Overall credit growth picked up to around 3 percent y/y, but below nominal GDP growth. - Lending to nonfinancial corporates grows moderately; household lending has begun to strengthen in recent months. - Non-performing loans around 2½ percent. - Return on equity at 12 percent at end-2024. - Tier 1 capital to risk-weighted assets ratio at 20.4 percent at end-2024. - Leverage ratio around 4½ percent, among the lowest in Europe. - Liquidity coverage and net stable funding ratios comfortably exceed minimum requirements. - Risks remain in real estate markets, mortgage lending, nonbank financial institutions (NBFIs), and cyber threats. - External position - Current account surplus widened to 12 percent of GDP in 2024, up from 11 percent in 2023. - Goods trade surplus increased from 7½ percent in 2023 to 9¼ percent of GDP in 2024, primarily driven by merchanting and processing (M&P) activities of a few large multinationals (particularly in pharmaceuticals), alongside a decline in imports. - Services trade surplus narrowed from 1½ percent in 2023 to ¾ percent of GDP in 2024. - Staff assessment: external position in 2024 was substantially stronger than implied by medium-term fundamentals and desirable policies. - Danmarks Nationalbank notes the 25 largest companies account for most corporate sector net savings. ### Outlook and Risks - Growth projections - Output growth expected to moderate from 3.7 percent in 2024 to 3.0 percent in 2025 and to 1.8 percent in 2026. - Exports growth, including pharmaceuticals, expected to slow. - Full reopening of the Tyra natural gas and oil field (operated at reduced capacity last year) will provide a temporary boost in 2025. - U.S. accounted for about 17½ percent of total exports and 12 percent of GDP in 2024. - A significant portion of Danish exports to the U.S. consists of M&P; exports of goods produced in Denmark passing through customs make up only 3 percent of total exports, limiting direct impact of U.S. tariffs. - Fiscal and external impacts of defense spending - A significant portion of increased defense spending in 2025–26 anticipated to be allocated to defense equipment procurements with high import content. - This will raise public expenditures and imports, thereby reducing the current account surplus. - Staff baseline assumes net exports will slow as defense equipment imports rise, and pharmaceutical export growth will decline. - Domestic demand expected to strengthen, driven by increased public expenditures and a modest recovery in private consumption due to improved consumer purchasing power. - Labor market and inflation outlook - Capacity pressures in the labor market projected to further fall as employment growth decelerates; positive employment gap projected to continue narrowing. - Inflation expected to stay around 2 percent. - Wage growth expected to moderate to around 3½ percent, down from 4 percent in 2024. - Key vulnerabilities and downside risks - Escalated geopolitical and trade tensions could hinder global growth prospects and affect Denmark through trade channels and geopolitical strains, including those related to Greenland. - If domestic challenges (labor supply and skills, fiscal buffers amid higher defense spending, climate change) are not managed effectively, they could undermine growth potential and long-term viability of the welfare state. - Financial sector risks: real estate markets, mortgage lending, NBFIs, and cyber threats. - Staff notes that a decline in public sector savings and structural policies to raise investment (including in climate) would help reduce the large current account surplus. *Source: 1dnkea2025001-print-pdf - 1. A Downside Scenario* ### 13. Elevated geopolitical and trade tensions, along with well-known structural headwinds, ### 13. Elevated geopolitical and trade tensions, along with well-known structural headwinds, ### Medium-term outlook and drivers - Staff expects potential growth to decelerate to around 1½ percent by 2030. - Adverse effects of global trade tensions would increase as the initial positive trade diversion effects diminish and tariff-driven distortions permeate global supply chains, weakening global growth and Denmark’s growth prospects. - Lower potential growth also reflects: - a maturing pharmaceutical sector, partly due to increased global competition in diabetes and obesity drugs; - a declining working-age population that reduces labor supply; - prudent expectations for non-pharmaceutical productivity growth. ### Risks to growth - Overall, risks to growth are tilted to the downside (Annex III). - External risks (dominant): - higher trade barriers and sanctions; - intensification of regional conflicts; - deepening geoeconomic fragmentation; - a larger-than-expected slowdown in the global economy (Box 1). - Although the impact of U.S. tariffs on the Danish economy is limited, firms heavily reliant on global supply chains might be impacted. - Denmark’s export sectors could face challenges from potential non-tariff barriers. - changes to U.S. drug price policies may negatively impact Danish pharmaceutical firms exposed to the U.S. market. - Domestic risks (negative): - global uncertainty could weaken consumer and business confidence, delaying the recovery of domestic demand; - a higher-than-expected increase in defense spending, especially if allocated to manpower, could pressure the labor market, leading to higher wages and inflation; - cyberattacks or the misuse of AI technology could add to these risks. - Upside risks: - faster-than-expected resolution of trade and geopolitical conflicts; - stronger external demand, notably for pharmaceutical products or from Germany, following the recently announced increases in public spending. ### Box 1 — A Downside Scenario (April 2025 WEO illustrative scenario) - Scenario considerations: - (i) global divergence (e.g., weaker productivity growth in Europe and weaker domestic demand in China); - (ii) a trade war (e.g., a ratcheting up of tariffs by the US and other countries); - (iii) an increase in global uncertainty; - (iv) tighter financial conditions. - Projected impacts (relative to the WEO reference forecast): - global GDP lowered by 1.3 percentage points by 2025 and 1.9 percentage points by 2026; - euro area GDP reduced by 1 percentage point by 2025 and 1.8 percentage points by 2026. - For Denmark: - the level of real GDP could be 1.6 percentage points below staff’s baseline in 2026 before gradually improving; - the annual GDP growth rate would be 1.1 percent in 2026, compared to 1.8 percent in the baseline. - Policy guidance under the scenario: - discretionary fiscal stimulus measures are not deemed necessary given the strength of the Danish economy and the flexicurity model.1 - staff would recommend allowing automatic stabilizers to fully operate.2 - the ECB may consider easing monetary policy to support the euro area; under the fixed exchange regime, DN will follow suit, which would further mitigate adverse impacts on the Danish economy. - Footnotes: - 1 The Danish flexicurity model has three core elements: (i) employers can hire and fire at will; (ii) employees can receive up to two years of unemployment benefits after losing their jobs; and (iii) the government runs education and retraining programs for the unemployed. - 2 The size of automatic stabilizers in Denmark is estimated to be large (see IMF April 2020 Fiscal Monitor Chapter 2). ### A. Upholding Fiscal Sustainability Amid Rising Defense and Aging-Related Spending - Fiscal outlook and measures: - Authorities announced a DKK 25 billion (¾ percent of GDP) increase in defense spending for 2025 and 2026, followed by DKK 10 billion per year through 2033. - Defense spending will temporarily rise from 2½ percent of GDP in 2024 to 3¼ percent in 2025 and 2026 before returning to 2¼ percent by 2033. - Planned non-defense measures include: - personal income tax cuts to enhance work incentives and boost labor supply; - increased employment in health and long-term care; - higher climate-related expenditures. - The overall surplus is projected to fall from 4½ percent of GDP in 2024 to 1¼ percent in 2025, and further to ½ percent in 2026. - The fiscal stance in 2025 is expansionary, with a structural balance change of –½ percent of potential GDP—which excludes the additional defense budget, as its impact on the domestic economy is limited. - Staff estimates that the growth impact of a structural balance easing of ½ percentage points of GDP is about 0.1 percent, using fiscal multipliers of 0.2–0.3. - Assessment of sustainability: - Denmark reduced the debt-to-GDP ratio to 31 percent at the end of 2024, down from nearly 50 percent a decade ago. - The government’s decision to gradually raise the retirement age to 70 years for those born after 1970, up from 67 years, will help support long-term fiscal sustainability. - The higher-than-expected fiscal surplus in 2024 (2¾ percent of GDP) provides additional room to accommodate increased defense spending within Danish fiscal rules. - In staff’s baseline scenario, the structural balance will stay above the -1 percent of GDP floor over the medium term, consistent with Denmark’s fiscal rules and a stable debt ratio (Annex IV). - Risks and required adjustments: - Significantly higher and more persistent increases in defense spending above the baseline would require adjustment measures to ensure long-term fiscal sustainability. - Other downside risks to the long-term fiscal outlook: - the supply-side measures taken may not generate the expected revenues; - climate change could accelerate faster than expected, requiring larger adaptation investments. - Illustrative policy guidance if adjustment is required: - Adjustment measures should be growth-friendly while ensuring fairness to preserve the welfare state. - While both expenditure and revenue measures should be explored, priority should be given to spending measures given the already high tax burden. - Conduct an in-depth assessment of expenditures to identify low-priority or inefficient spending. - Implement expert committee recommendations on active labor market policies and business subsidies. - Enhance public administration efficiency by leveraging digitalization and AI.8 - Structural reform programs should be vigorously pursued to boost labor supply and enhance productivity (see Section C). - The structural deficit limit of 1 percent of GDP under the current fiscal rules should be respected. ### B. Safeguarding Financial Stability - Systemic assessment: - Systemic risks have been contained, but sectoral risks remain. - Household sector risks: - Despite higher interest rates, households have shown resilience, supported by a strong labor market and reduced indebtedness. - Debt service costs have risen as a share of income, with more borrowers refinancing fixed- and low-interest mortgages to variable rates; some opted for deferred amortization.9 - Mortgage loan growth has picked up; about 23 percent of new mortgages were extended to borrowers with a loan-to-value ratio above 90 percent and about 21 percent to those with a debt-to-income ratio above four in 2024:Q4. - The heat map suggests reduced but still elevated housing sector risk. - Real estate market risks: - Residential real estate activity has continued to recover, with increased transactions and rising house prices. - Staff estimates that house prices are slightly overvalued compared to their fundamentals. - Commercial real estate (CRE) markets have not fully recovered: CRE prices are rebounding, but transaction volumes remain suppressed. - Growth of lending by Danish systemically important banks to the CRE sector stood at around 6 percent y/y in 2024:Q4; CRE exposures account for about 40 percent of total corporate lending. - Inward and outward interconnectedness exposes the Danish CRE market to regional market volatility.10 - The heat map suggests heightened risk in the CRE sector. - Corporate sector risks: - Bankruptcies have fallen to historical averages, indicating resilience despite increased financing costs. - Higher interest rates have increased debt service burden, challenging some corporates—especially in the real estate, trade, and manufacturing sectors—as evidenced by a moderate increase in banks’ stage 2 loans. - Cyber risks: - Cybersecurity incidents have risen due to elevated geopolitical tensions. - In November 2024, the Centre for Cyber Security raised the threat level for destructive cyberattacks against Denmark’s financial sector from low to medium. - The latest cyber stress test by the Danish Financial Supervisory Authority (DFSA) in 2023 revealed vulnerabilities, particularly among third-party providers. - Nonbank financial institutions (NBFIs) risks: - The pension and insurance sector has total assets around 200 percent of GDP with strong domestic and cross-border interconnectedness. - A large share of non-guaranteed market rate products and limited direct CRE market exposure help mitigate risks. - Pension and insurance companies are exposed to market and liquidity risks, susceptible to financial market volatility. - System strengths and supervisory measures: - Financial system stability is supported by banks’ sizeable capital and liquidity buffers. - Household risks are alleviated by robust job creation, low unemployment, and comprehensive social safety nets. - Banks’ balance sheets are solid, with low nonperforming loans; earnings are expected to remain relatively high, albeit lower than recent highs. - Authorities implemented supervisory guidelines on CRE to ensure robust underwriting, provisioning and appraisal practices. - Authorities have intensified efforts to address climate change risks to the financial sector (Annex V). - DN’s stress tests indicate that all systemic banks, after utilizing their capital buffers, maintain sufficient capital to endure a severe recession and hold liquidity buffers to survive a four-month period under extreme liquidity stress scenarios.11 - Supervisory recommendations: - Supervisors should ensure that banks maintain robust provisioning practices for credit risks; provisions have remained stable and low. - Vigilance is advised in monitoring and addressing financial sector vulnerabilities amid heightened global risks. *Source: 1dnkea2025001-print-pdf - 13. Elevated geopolitical and trade tensions, along with well-known structural headwinds, (IMF).* ### 6.2 percent over three years, (ii) the unemployment rate increases by 7.1 percentage points, and (iii) house prices fall ### 1dnkea2025001-print-pdf - 6.2 percent over three years, (ii) the unemployment rate increases by 7.1 percentage points, and (iii) house prices fall ### Macroeconomic stress scenarios and key shock parameters - Severe recession scenario shocks (three-year accumulated changes and level changes): - GDP: 6.2 percent over three years. - Unemployment: increases by 7.1 percentage points. - House prices: fall by 25.9 percent. - Liquidity stress test design elements: - Based on calculations of each bank’s excess liquidity under different assumptions about: the proportion of contractual term deposits and market funding that mature; the amount withdrawn from committed facilities and demand deposits; and the realization value of the assets in the liquidity buffer. - Noted modelling/assumption: - In the severe recession scenario, it is assumed that the countercyclical capital buffer will be released, resulting in higher levels of excess capital. *Source: Danmarks Nationalbank, Financial Stability Analysis, No. 18, Nov 26, 2024.* ### Banking resilience, excess capital, and provisioning - Excess capital: - Exhibit shows excess capital in different scenarios measured as Percent of risk exposure amounts (figure description). - Note: release of the countercyclical capital buffer in the severe recession raises excess capital levels. - Provisioning: - Figure referenced: "AE in Europe: Net Provisioning Expense to Total Assets Ratio (Percent)" with percentiles and Denmark’s specific value plotted (time series through 2024Q4). - Supervisory model reviews and regulatory implementation: - Review IFRS 9 modeling practices, including credit risk modeling (e.g., probability of default modeling) and incorporation of forward-looking information; follow with remedial actions as necessary. - Authorities have launched a review of internal ratings-based models in line with European Banking Authority guidelines, focusing on residential and commercial real estate portfolios; completion should be prompt and followed by supervisory actions. - Implementation of the EU’s CRR III/CRD VI banking package, including the output floor for banks using internal models to calculate risk weights, should proceed as planned. - Ongoing joint Nordic-Baltic banking stress testing exercise to enhance understanding of cross-border exposures and linkages; initial analysis expected to be presented to the Nordic-Baltic Macroprudential Forum by the end of this year. ### Macroprudential stance and borrower-based measures - Current capital-based buffers: - Countercyclical capital buffer (CCyB): 2.5 percent. - Sector-specific systemic risk buffer for CRE: 7 percent (introduced in June 2024). - Recommendation: Keep CCyB at 2.5 percent and the 7 percent CRE buffer for now given heightened global risks and the fragile CRE sector. - Contingency: If downside risks materialize and credit constraints become binding, authorities could consider lowering the CCyB rate. - Borrower-based measures and mortgage vulnerabilities: - Recommendation: Consider tightening borrower-based measures, including lowering the maximum loan-to-value ratio below the current 95 percent. - Recommendation: Reduce incentives for bigger mortgages by lowering the tax deductibility of mortgage interest expenses. ### Supervisory capacity and DFSA resourcing - Staffing and resources: - Ensuring adequate staffing for the DFSA across a range of skills is critical to its supervisory mandate. - DFSA’s human resources are challenged by difficulties in recruiting and retaining qualified staff. - Recommendation: Authorities are encouraged to review the adequacy of supervisory resources and increase the DFSA’s budget as necessary. ### Non-bank financial institutions (NBFIs) and insurance/pension oversight - Monitoring and frameworks: - DFSA has developed a stress testing framework for insurance and pension firms; DN has increased focus on the NBFI sector in its financial stability assessment. - Recommendation: Continue strengthening the oversight framework for NBFIs given their size, interconnectedness, and susceptibility to market vulnerability. - Key priorities: - Finalize the supervisory order on the stress testing framework for insurance and pension firms to replace quarterly sensitivity analysis and integrate the framework into overall supervisory policy; focus on resilience to liquidity and market shocks. - Develop a framework for systemic risk assessment covering banks and NBFIs. - Ensure insurance and pension companies provide clear advice to clients about financial and longevity risks when selling non-guaranteed products, in line with the recently issued Executive Order on Management of Insurance Companies. ### AML/CFT progress and planned updates - Progress areas (in line with the 2023 Nordic-Baltic regional TA report): - Strengthen the risk-based supervision framework. - Develop a minimum AML/CFT supervisory engagement model. - Enhance collection of data and information, including cross-border financial flows and emerging threats such as trade-based money laundering. - Create a tailored methodology to identify higher-risk jurisdictions. - Recommendation: Given elevated geopolitical risks and evolving threats, authorities should update the national risk assessment by the end of this year, as planned. ### Structural reforms to boost growth and labor supply - Growth challenges and productivity: - Aggregate productivity growth recovery largely reflects pharmaceuticals and, to a lesser extent, construction and information and communication industries; productivity growth in the rest of the economy is less impressive. - Risks: rearmament could divert resources from growth-enhancing reforms and welfare programs. - Labor market and skills: - Recommendations to address labor supply and skills mismatches: - Make Active Labor Market Policies (ALMPs) more cost-effective: Denmark’s spending on ALMPs is at two percent of GDP; planned rationalization to reduce costs by 0.1 percent of GDP and streamline the system for greater transparency. This reform plan should be implemented to preserve the strengths of the Danish flexicurity model. - Continue to assess the appropriateness of foreign worker recruitment schemes (salary requirements, positive list), and evaluate integration program effectiveness. - Enhance vocational education and training; implement initiatives under "Prepared for the Future VII" to reduce dropout rates and attract youth to vocational training and vocation-oriented high schools. - Sectoral skills gaps: - Danish companies face challenges hiring workers with specific skills, such as ICT specialists; basic digital skills exceed the EU average but are below top-performing countries. - Anticipated demand: aging population will increase demand for health and personal care professionals; digital, AI, and green transitions will require relevant skilled workers. ### Digitalization, AI, entrepreneurship, and business dynamism - AI and digital readiness: - Denmark has implemented an AI strategy since 2019 and launched its first AI supercomputer in October 2024 to facilitate research and innovation. - Challenges: lack of expertise and high costs; planned curriculum revision to strengthen digital education in primary and secondary schools; strengthening cybersecurity remains critical. - Public sector adoption: In December 2024, authorities introduced a new strategic approach aimed at adopting AI in the public sector. - Entrepreneurship and scale-ups: - Planned measures to support start-ups and scale-ups: - Increase the tax deduction for R&D expenditure from 108 percent to 120 percent by 2028. - New entrepreneurship strategy to support start-ups and scale-ups by improving access to capital, lowering taxes, and easing regulatory burden. - Policy table (selected measures) includes lowering tax on equity investment and entrepreneurs, expanding the Danish Export and Investment Fund, reducing capital requirements for establishing private limited companies, utilizing regulatory sandboxes, strengthening entrepreneurship education, expanding tax credits for R&D expenses, and strengthening access to capital by SMEs. - EU single market: - Deeper EU integration, such as Capital Market Union, would enhance economies of scale and network effects to support Danish businesses and facilitate access to capital. ### Energy security, climate adaptation, and mitigation - Climate adaptation: - Denmark is particularly vulnerable to sea level rise, storm surges, and coastal erosion; National Climate Adaptation Plan II focuses on enhanced coastal and groundwater protection, urban flood management, and assessment of infrastructure needs and financing responsibilities. - Recommendation: Update investment needs and review the property insurance scheme (“Storm Surge Scheme”) to make insurance premiums risk-based. - Energy security and renewables: - With full reopening of the Tyra oil and gas field, Denmark will become a net gas exporter. - Denmark aims for 100 percent renewable electricity consumption by 2028, including expanding offshore winds with public support; such support should be carefully designed to minimize fiscal costs and risks while adhering to EU state aid rules. - Denmark plans to build a hydrogen pipeline to export green hydrogen to Germany, which will strengthen energy security in Europe. - Mitigation target: - Denmark is on track to meet its national target of a 70 percent reduction of GHG emissions compared with 1990 by 2030. *Source: Danmarks Nationalbank, Financial Stability Analysis, No. 18, Nov 26, 2024.* ### 35. The authorities broadly concurred with staff's assessment of the economic outlook. ### 35. The authorities broadly concurred with staff's assessment of the economic outlook. ### Economic outlook and external sector - Domestic demand: sluggish growth; slowdown has eased capacity pressures. - Exports: significant expansion, driven by pharmaceuticals; slowing exports expected to offset a pickup in domestic demand. - Authorities expect growth to moderate in the near term; inflation and wage pressures remain contained. - Risks: significant downside risks from trade conflicts, geopolitical unrest, and weaker global growth, including reversal of globalization, higher trade barriers, and deepening geoeconomic fragmentation. - External balance: authorities view widening current account surplus largely reflects merchanting and processing activities by a few large firms; balance of payments data, including net errors and omissions, likely to be revised. - Staff assessment: Denmark’s external balance is stronger than the level implied by medium-term fundamentals and desirable policies. - Projections and medium-term view: - Medium-term growth projected at around 1.5 percent, assuming a maturing pharmaceutical sector and a declining working-age population. - Inflation anticipated to stay around 2 percent. ### Fiscal policy and defense spending - Ministry of Finance view: easing capacity pressures create room for fiscal easing in the near term to support a soft landing while allowing higher spending on defense and security, healthcare, the green transition, lower personal income taxes, and business tax reforms. - Commitment to long-term fiscal sustainability: announced temporary increase in defense spending viewed as manageable without jeopardizing national fiscal rules. - Potential further increase in defense spending: political decision expected later this year following NATO meetings in June. - If defense spending becomes significantly higher and more persistent, adjustment measures would be required to ensure long-term fiscal sustainability. - Adjustment principles: should be growth-friendly and ensure fairness to preserve the welfare state; both expenditure and revenue measures should be explored, with adjustments possibly coming more from spending than revenue given the already high tax burden. - Structural balance rule: the structural balance floor of -1 percent of GDP under current national fiscal rules should be respected. - Efficiency gains: government will explore enhancing efficiency in public spending, including through digitalization and AI. - Tax policy note: scope may exist to raise some taxes without materially distorting labor incentives; current tax level reflects political priority for a broad-based welfare system. ### Financial system soundness and supervision - Overall assessment: financial system remains sound. - Banking sector: - Banks have adequate capital and liquidity buffers, strong profitability, and low nonperforming loans. - Authorities committed to vigilant monitoring of financial sector risks. - Risks/actions identified: - Thoroughly examine banks’ IFRS 9 modeling practices to ensure robust credit risk provisioning. - Complete review of internal ratings-based models. - Implement CRR III/CRD VI per the EU transition plan. - Ensure adequate staffing of the Financial Supervisory Authority. - Enhance resilience against cyberattacks. - Non-banking financial sector (NBFIs): - Insurance and pension firms maintain strong capital and liquidity; large portion of non-guaranteed market-return products mitigates financial risk exposure. - Given high interconnectedness and size of NBFIs, authorities see value in developing a systemic risk assessment framework encompassing both banks and non-banks and strengthening the oversight framework for NBFIs. - AML/CFT: authorities remain committed to further strengthening the Anti-Money Laundering/Countering the Financing of Terrorism framework and updating the national risk assessment by the end of 2025. ### Macroprudential policy and housing market measures - Capital-based macroprudential policy: broadly appropriate. - Current settings to remain in place: - 2.5 percent countercyclical capital buffer. - 7 percent sector-specific systemic risk buffer (CRE). - Borrower-based measures: should be tightened to address pockets of vulnerabilities. - Recommendations: - Consider lowering the maximum loan-to-value ratio below the current 95 percent. - Reduce incentives for larger mortgages by lowering the tax deductibility of mortgage interest expenses. - Authorities’ position: - DN concurred that lower tax deductibility of mortgage interest expenses and tighter borrower-based measures would enhance resilience. - Ministries expressed concerns about potential negative impacts on the housing market and noted deductibility should be seen in context of a tax system treating positive and negative capital income symmetrically. - Ministries saw no need for legislative changes to financial sector institutional arrangements per 2020 FSAP recommendations. ### Structural reforms, labor supply, and digitalization/AI - Authorities remain committed to structural reforms to boost long-term growth and labor supply. - Ongoing initiatives: - Implementing the entrepreneurship strategy to boost business dynamism. - Increasing supply of foreign labor in jobs facing shortages. - Enhancing digital education and strengthening vocational training. - Developing a strategy to deploy AI solutions at scale across the public sector while ensuring responsible and ethical use. - Policy priorities: - Continue efforts to support entrepreneurship, harness digitalization and AI, and reduce regulatory burdens on businesses while balancing costs and benefits. - Ensure sufficient labor supply with skills in IT, health, and long-term care. - Deepening the EU single market is expected to enhance business dynamism and potential growth; benefits and costs of regulatory and administrative requirements arising from EU regulations should be reviewed. - Denmark’s upcoming EU Presidency will prioritize review of these issues. ### Climate adaptation and insurance - Challenges: developing a long-term climate adaptation plan complicated by shared responsibilities among citizens, utility companies, and central and local governments. - Government actions: - Developing National Climate Adaptation Plan II focusing on enhanced coastal and groundwater protection, urban flood management, assessment of infrastructure needs, and financing responsibilities among central and local governments and the private sector. - Review of the storm surge insurance premium is ongoing. - Recommendation: authorities are encouraged to reform the property insurance scheme (“Storm Surge Scheme”) to make insurance premiums risk-based. ### Staff appraisal — key judgments and recommendations - Growth: expected to remain relatively strong but gradually moderate to potential; medium-term projection around 1.5 percent. - Inflation and labor market: labor market pressures have eased; inflation anticipated to stay around 2 percent. - Fiscal: Denmark’s fiscal position is strong; significantly higher and more persistent defense spending would require adjustment measures consistent with long-term sustainability and the structural balance floor of -1 percent of GDP. - Financial stability recommendations: - Thoroughly examine banks’ IFRS 9 modeling practices. - Complete review of internal ratings-based models. - Implement the EU’s CRR III/CRD VI as planned. - Enhance resilience against cyberattacks. - Ensure adequate staffing of the Financial Supervisory Authority. - Strengthen oversight framework for NBFIs. - Continue efforts to further strengthen the AML/CFT framework. - Macroprudential and housing recommendations: - Maintain 2.5 percent countercyclical capital buffer and 7 percent sector-specific systemic risk buffer. - Consider lowering maximum loan-to-value ratio below current 95 percent. - Reduce incentives for larger mortgages by lowering tax deductibility of mortgage interest expenses. - Structural reform priorities: - Intensify reforms to sustain high income, preserve fiscal space, and support the welfare state. - Strengthen entrepreneurship policies, harness digitalization and AI, reduce regulatory burdens, and ensure adequate skilled labor supply. - Continue support for multilateral and transparent trade policies. - Climate adaptation recommendation: implement a well-designed long-term adaptation plan and reform the Storm Surge Scheme toward risk-based premiums. *Source: IMF staff report and authorities’ discussions as presented in the provided content.* ### 48. It is recommended that the next Article IV consultation with Denmark be held in the ### It is recommended that the next Article IV consultation with Denmark be held in the standard 12-month cycle. ### Recent developments and growth composition - Pharmaceutical production expanded significantly over the past few years, driving overall growth. - Private consumption has been weak across all types of expenditures. - Gross capital formation has picked up recently, driven by investments in IP and changes in inventories. - Employment growth has moderated across sectors. - Business confidence has gradually recovered, while consumer confidence remains weak. - Contributions to Real GDP growth (selected datapoints shown in figures): Real GDP growth: 1.5 percent (2025 proj., Table 1); recent quarterly breakdowns show sector contributions from Pharmaceuticals, Manufacturing excl. pharmaceuticals, Trade and Transport, Taxes Less Subsidies on Products (Figure 1). ### Financial soundness indicators (banking sector) - Risk-weighted capital ratios remained well above regulatory requirements: Regulatory capital to risk-weighted assets: 23.5 percent (2022), 23.1 percent (2024) (Table 5). - Common Equity Tier 1 capital to risk-weighted assets: 19.8 percent (2022), 19.3 percent (2024) (Table 5). - Return on equity: 12.1 percent (2023), 12.0 percent (2024) (Table 5). - Nonperforming loans remained low: NPLs to total gross loans: 2.8 percent (2023), 2.4 percent (2024) (Table 5). - Provisions to nonperforming loans: 34.3 percent (2023), 35.0 percent (2024) (Table 5). - Liquidity and funding: Liquidity coverage ratio: 201.7 (2021), 216.8 (2022), 196.0 (2023), 217.6 (2024), 226.0 (2024) noted in Figure 2 and Table 5; Net stable funding ratio: 135.1, 140.1, 135.1 (Table 5). - Net FX open position was balanced in 2024 (Figure 2). ### Real estate market and household balance sheets - Lending rates on banks’ new loans declined from their peak; Average Mortgage Rates and House Prices series shown (Figure 3). - Denmark’s mortgage covered bond market is the largest in Europe: Outstanding amount, 2023: DNK 121 percent of GDP (highest bar in Mortgage Covered Bond Markets chart, Figure 3). - Ownership shares of Danish mortgage bonds (2024 series): Credit institutions, Other asset managers, Insurance and pension, Foreign, Other (Figure 3). - Commercial Real Estate foreign ownership (October 2024): notable shares from LUX, SWE, NOR, etc., with Luxembourg and Swedish investors having sizable ownership (Figure 3). - Household indebtedness is high relative to other advanced economies: Household Debt as Percent of Net Disposable Income (2023) chart shows Denmark among the highest (Figure 3). - Households maintain high financial net worth: Household Net Financial Worth (Percent of GDP) shows Denmark with high levels and a positive change from 2021Q4 to 2024Q3 (Figure 3). ### Pension and insurance sector developments - Pension and insurance profitability increased slightly in 2024 (Insurance and Pension Fund Performance series, Figure 4). - Cross-border exposures continued to rise; exposure to North/Central American markets accounts for around half of the total (Insurance and Pension Fund Foreign Exposures, March 2025: North/Central America 46.5 percent) (Figure 4). - Insurance and pension companies continued to hold a high share of liquid assets while increasing investments in listed shares; investment in equities now exceeds investment in bonds (Investment by Insurance and Pension Companies: investments in equities surpass investments in bonds by 2025Q1) (Figure 4). - Market-rate product share of insurance provisions increased (Market Rate Product Share of Insurance Provisions: 28–48 percent range across 2018Q1–2024Q4 series) (Figure 4). - Asset composition (2024Q4): Listed Shares, Bonds, Other liquid, Investment fund shares, Alternatives (Figure 4). ### Labor market and education outcomes - Male labor participation rate is higher than or comparable with the EU average but falls short of the top 3 EU countries (Labor Participation Rate charts; 2008–2024 series) (Figure 5). - Female labor participation rate similarly is high versus the EU average but below top EU performers (Figure 5). - Employment rate among people with low education attainment is similar to the Nordics and EU averages (Employment Rate by Educational Attainment, 25–54 years; 2024Q4) (Figure 5). - The share of the population with low education attainment is relatively high (Share of Population with Low Educational Attainment, 25–34 years old; 2024) (Figure 5). - Average weekly hours worked per worker are among the lowest in the EU (Average Weekly Hours Worked by Gender, 2024) (Figure 5). - The share of the foreign labor force is lower than the EU and Nordic averages (Share of Foreign Labor Force, 2010–2024 series) (Figure 5). ### AI and digitalization preparedness - Denmark’s AI Preparedness Index (AIPI) score: Denmark = 0.78, among the highest internationally (AI Preparedness Index, Figure 6). - Share of enterprises using AI technology (2024): Denmark shows one of the highest shares among peers (Share of Enterprises using AI Technology chart) (Figure 6). - Digital infrastructure: Fixed Very High Capacity Network (VHCN), FTTP, and Overall 5G coverage — Denmark scores above EU average (Digital Infrastructure chart) (Figure 6). - Digital transformation of businesses: high shares of SMEs with at least a basic level of digital intensity, cloud, artificial intelligence, and data analytics adoption (Digital Transformation of Businesses chart) (Figure 6). - Digital public services and e-Government: strong performance but room to strengthen e-Government (Digitalization of Public Services score, 0 to 100) (Figure 6). - Digital skills: Denmark shows high ICT specialists share but still scope to strengthen overall digital skills (Digital Skills chart) (Figure 6). ### Macroeconomic projections and public finances (2022–30, Table 1–3 highlights) - Real GDP growth: 1.5 percent (2025), followed by 1.8 percent (2026), 1.6 percent (2027), 1.5 percent (2028), 1.5 percent (2029), 1.5 percent (2030) (Table 1). - Total domestic demand: 3.1 percent (2025), 1.8 percent (2026), 1.8 percent (2027), 1.7 percent (2028), 1.5 percent (2029), 1.5 percent (2030) (Table 1). - Private consumption: 1.4 percent (2025), 1.4 percent (2026), 1.3 percent (2027), 1.3 percent (2028), 1.2 percent (2029), 1.2 percent (2030) (Table 1). - Gross capital formation: 5.0 percent (2025), 4.1 percent (2026), 2.6 percent (2027), 2.3 percent (2028), 1.6 percent (2029), 1.8 percent (2030) (Table 1). - HICP (year average) inflation: 2.0 percent (2025), 1.9 percent (2026), 2.0 percent (2027), 2.0 percent (2028), 2.0 percent (2029), 2.0 percent (2030) (Table 1). - Overall balance (general government, percent of GDP): 1.6 percent (2025), 1.5 percent (2026), 0.6 percent (2027), 0.2 percent (2028), -0.1 percent (2029), -0.4 percent (2030) (Table 1). - Gross debt (percent of GDP): 29.3 percent (2025), 28.0 percent (2026), 27.5 percent (2027), 27.4 percent (2028), 27.5 percent (2029), 28.0 percent (2030) (Table 1). - Total revenues and expenditures (percent of GDP, Table 3): Total revenues: 50.0 percent (2024), 50.0 percent (2025 onward ~49.5–49.5 percent range); Total expenditures: 46.5 percent (2024), 48.4 percent (2025), 48.9 percent (2026), 48.9 percent (2027), 49.3 percent (2028), 49.6 percent (2029), 50.0 percent (2030). ### Balance of payments and international investment position - Current account (percent of GDP): 11.1 percent (2022), 10.9 percent (2023), 12.1 percent (2024), projected 11.4 percent (2025), 11.2 percent (2026), 11.0 percent (2027), 10.7 percent (2028), 10.4 percent (2029), 10.2 percent (2030) (Table 6). - Trade balance (goods and services, percent of GDP): 9.5 percent (2022), 8.9 percent (2023), 10.1 percent (2024) (Table 1 and Table 6). - Current account (billions of DKK): 316.1 (2022), 306.8 (2023), 356.9 (2024) (Table 6). - International Investment Position (IIP, end-year assets and liabilities): Assets: 11,035 (2024, Billions of DKK); Liabilities: 8,717 (2024, Billions of DKK); Net Investment Position: 2,318 (2024, Billions of DKK) (Table 7). - Net Investment Position (percent of GDP): 46.4 percent (2016) rising to 78.3 percent (2024) series (Table 7). *Source: IMF staff compilation from figures, tables, and text in the provided content unit.* ### Annex I. Implementation of Past IMF Policy Recommendations ### Annex I. Implementation of Past IMF Policy Recommendations ### 2024 Article IV Advice — Fiscal Policy - Short-term recommendation: fiscal policy should avoid adding to capacity pressures. - Actions since 2024 Article IV: - "The fiscal stance was tight in 2024, with the structural surplus increased." - "Anticipated slight easing of fiscal stance in the medium term is appropriate, but the government should continue to monitor the long-term fiscal pressures and implement additional fiscal adjustment measures as necessary." - "Despite the significant increase in defense spending, the authorities remain committed to long-term fiscal sustainability." - Recommendation: "Develop an implementation plan of the National Climate Adaptation Plan I and update the estimates of the investment needs." — Status: "Ongoing." ### 2024 Article IV Advice — Financial Sector - Recommendation: "Consider additional borrower-based measures to contain excessive risk-taking and impose tightening conditions on new mortgages extended to highly leveraged households." — Status: "There are no plans to implement these measures." - Recommendation: "Bridge the remaining data gaps to strengthen vulnerability assessment in the CRE sector." — Status: "Ongoing." - Recommendation: "Integrate stress testing for insurance and pension companies into an overall supervisory policy and develop a framework for a systemic risk assessment encompassing banks and NBFIs." — Status: "Ongoing." - Recommendation: "Finalize a supervisory order aiming to strengthen the duties of NBFIs to provide their clients with clear advice on the financial and longevity risks." — Status: "Ongoing." ### 2024 Article IV Advice — Structural Reforms - Recommendation: "Continue efforts to address skill mismatches, including in vocational training, education, and recruitment from abroad." — Status: "Ongoing. New policies are being introduced in vocational training, education, and recruitment from abroad." - Recommendation: "Reform public sector wage setting to better address labor shortages in certain sectors." — Status: "Ongoing." - Recommendation: "Modernize active labor market policies (ALMP)." — Status: "Ongoing. The government has agreed on the ALMP reform in April 2025, following the experts’ recommendations." - Recommendation: "Continue to develop policies to improve education outcomes of the children with immigrant backgrounds and, more broadly, to strengthen their integration into Danish society." — Status: "Ongoing." - Recommendation: "Continue to review the size and effectiveness of the R&D tax incentive." — Status: "Ongoing." *Italic: Source: Annex I. Implementation of Past IMF Policy Recommendations (from the provided IMF content)* --- ### Annex II. External Sector Assessment ### Overall assessment - "The external position has strengthened in 2024 and is now assessed as substantially stronger than the level implied by medium-term fundamentals and desirable policies." - Current account (CA) surplus: "12.1 percent of GDP in 2024, up from 10.9 percent of GDP in 2023." - Goods surplus: "expanded from 7.5 percent of GDP in 2023 to 9.3 percent of GDP in 2024, primarily driven by merchanting and processing activities of a few large multinational enterprises, particularly in the pharmaceutical sector." - Services surplus: "declined from 1.4 percent of GDP to 0.8 percent of GDP in 2024." - Potential policy response: "An anticipated decline in public sector savings and structural policies aimed at raising investment, including in climate, would help reduce the surplus." ### Foreign Asset and Liability Position and Trajectory - Background and levels in 2024: - "NIIP rose to 78 percent of GDP in 2024." - "Gross liabilities decreased by 25 percentage points to 294 percent of GDP." - "Gross external debt ... standing at 129 percent of GDP." - "Net asset position of financial corporations ... increased by 11 percentage points to 146 percent of GDP." - "Insurance and pension funds (67 percent of GDP) and investment funds (55 percent of GDP) act as net external lenders." - "Deposit-taking corporations are net external debtors (-20 percent of GDP)." - "Households are also net external lenders (10 percent of GDP)." - "Nonfinancial corporations (-69 percent of GDP) and the government (-11 percent of GDP) are net external debtors." - Assessment: "The NIIP is expected to improve further in the medium term, reflecting the outlook for continued CA surpluses. Although rollovers of external debt may present some vulnerability, risks are moderated by banks’ ample liquidity and large capital buffers. The NIIP level and trajectory do not raise sustainability concerns." - Table of 2024 (% GDP): "NIIP: 78.3 Gross Assets: 372.7 Debt Assets: 106.8 Gross Liab.: 294.4 Debt Liab.: 108.6" ### Current Account - Background: - "The current account (CA) surplus rose by 1.1 percentage points to 12.1 percent of GDP in 2024." - Drivers: "higher goods surplus, particularly from exports in the form of merchanting and processing ... continued expansion of the pharmaceutical sector. Lower imports of goods also contributed." - "The balance of services further declined, from 1.4 percent of GDP in 2023 to 0.8 in 2024." - "Primary income continued to be stable at 3.2 percent of GDP." - "The CA surplus reflected positive saving-investment (S-I) balances for both public and private sector, about 5 and 8 percent of GDP, respectively in 2024." - Assessment and adjustments: - "The cyclically adjusted CA surplus is estimated at 12.4 percent of GDP." - Adjustments for temporary factors: "valuation losses on fixed-income securities attributed to inflation (0.4 percent of GDP) and retained earnings on portfolio equity investments (0.5 percent of GDP). Incorporating these adjustments, the adjusted CA surplus is 11.5 percent of GDP." - "The EBA CA norm is estimated at 5.9 percent of GDP, of which 4.1 percent of GDP is attributed to policy gaps (largely reflecting a relatively tighter fiscal stance and a negative credit gap)." - "Taking the difference between the adjusted CA (11.5 percent of GDP) and the norm (5.9 percent of GDP), the CA gap is estimated at 5.6 percent of GDP." - Note: "the estimated EBA norm for Denmark is low ... This suggests that the EBA model does not fully capture other factors ... These include (i) a significant increase in Denmark’s merchanting and processing activities abroad ... and (ii) Denmark’s large pension contributions arising from the ongoing transition to the fully-funded retirement system." - "Complementary EBA tools suggest that Denmark’s pension system could explain potentially about 2.5 percentage points of the gap." ### Real Exchange Rate (REER) - Background: - "The exchange rate arrangement is a conventional peg regime, with Denmark’s currency pegged to the euro." - "The real effective exchange rate (REER) based on relative unit labor costs (ULCs) appreciated by 0.3 percent, and the REER based on CPI depreciated by 0.8 percent in 2024 compared to the previous year." - Assessment: - "Based on the CA gap model applying an estimated elasticity of -0.5, staff estimate a REER undervaluation of -11.6 percent in 2024." - "The REER level and index models for 2024 suggest an overvaluation of 1.6 percent and 7.6 percent, respectively." - "Comparing two different measures of REER to their 28-year averages in 2023, the REER ULC-based index indicated an undervaluation of 0.4 percent, whereas the REER CPI-based index pointed to an undervaluation of 4 percent." ### Capital and Financial Accounts: Flows and Policy Measures - Background: "The capital and financial account balance increased to 8.0 percent of GDP in 2024, from 7.7 percent of GDP in 2023," composed of: - "capital transfers (-0.4 percent of GDP), financial derivatives (-1.8 percent of GDP), portfolio investment (8.1 percent of GDP), FDI flows (2.8 percent of GDP), and reserve assets (0.4 percent of GDP)." - "Other investment turned negative to -1.5 percent of GDP in 2024, from 2.4 percent of GDP in 2023." - Assessment: "The strong external position limits vulnerabilities to capital outflows, which are inherent in countries with a large financial sector. While this volatility is a potential source of vulnerability, it is mitigated by sound financial regulation and supervision, as well as ensuing high capitalization and ample liquidity buffers of Danish banks." ### FX Intervention and Reserves Level - Background and actions: "Given the Danish krone is pegged to the euro, Danmarks Nationalbank (DN) adjusts the interest rate spread relative to the ECB’s monetary policy rate ... and occasionally shapes the exchange rate using interventions financed via its FX reserves. While lowering its policy rate four times in 2024, DN has been maintaining it below the ECB rate amid depreciation pressures, with no FX intervention since February 2023." - Assessment and levels: "International reserves increased by DKr23 billion in 2024, reaching DKr679 billion in December 2024. Reserves were equivalent to about 23 percent of GDP and 3.9 months of imports." ### Model Estimates for 2024 (as reported) - CA-Actual: "12.1" - Cyclical contributions (from model): "(-)-0.3" - Valuation losses on fixed income securities due to inflation: "0.4" - Retained earnings on portfolio equity investment: "0.5" - Adjusted CA: "11.5" - CA Norm (from model) 1/: "5.9" - o/w Relative policy gap: "4.1" - CA Gap: "5.6" - Elasticity: "-0.5" - REER Gap (in percent): "-11.6 1.6 7.6" *Italic: Source: Annex II. External Sector Assessment (from the provided IMF content)* --- ### Annex III. Risk Assessment Matrix — Selected Risks, Likelihood, Impact, and Policy Responses - Global: Trade policy and investment shocks - Relative likelihood: "High" - Impact if realized: "High" - Policy response: "Step up further structural reforms and let flexicurity operate to facilitate reallocation from sectors exposed to shocks and regional labor mobility. Allow automatic stabilizers to operate. Fiscal policy space should be used to provide targeted support to vulnerable households and businesses." - Global: Regional conflicts (e.g., Middle East, Ukraine, Sahel, East Africa) - Relative likelihood: "Medium" - Impact if realized: "Medium" - Policy response: (implied) continue monitoring; acknowledgment that "Denmark’s direct exposure to the countries in conflict is limited. Nevertheless, ... would weigh on activity in trading partners, reducing external demand." - Global: Deepening geoeconomic fragmentation - Relative likelihood: "High" - Impact if realized: "High" - Policy response: "In collaboration with partners, continue to support global cooperation and multilateralism. Develop risk mitigation strategies with close coordination at the EU level." - Global: Cyberthreats - Relative likelihood: "Medium" - Impact if realized: "Medium" - Policy response: "Continue to promote public awareness and preparedness campaigns and to invest in cyber defense. For the financial sector, utilize the recently developed cyber stress testing framework." - Regional and Domestic: Weaker domestic demand - Relative likelihood: "Medium" - Impact if realized: "Medium" - Policy response: "Step up further structural reforms and let flexicurity operate to facilitate reallocation from sectors exposed to shocks and regional labor mobility. Allow automatic stabilizers to operate. Fiscal policy space should be used to provide targeted support to vulnerable households and businesses." *Italic: Source: Annex III. Risk Assessment Matrix (from the provided IMF content)* --- ### Annex V. Climate Change Risks and Data Gaps in the Financial Sector ### Key findings and context - Purpose: "This annex examines Denmark’s current initiatives to identify data gaps that could inform financial stability assessments regarding climate change risks." - Recommendation summary: "To enhance these efforts, Danish authorities could expand publicly available indicators in alignment with the international and regional initiatives, tailor indicators for the nonbank financial institutions (NBFIs), and provide banks with guidance to enhance the comparability of their Pillar 3 disclosures." - Climate risks: "rising sea levels, floods, and storms are expected to increasingly impact the economy and infrastructure, exposing financial institutions to physical risks ... Denmark is also expanding its carbon taxes across various sectors, including agriculture. While these mitigation efforts contribute to addressing climate change, they also impose transition costs on the economy." - Data and indicator needs: "Effectively measuring and managing physical and transition risks to the financial sector relies on robust climate change data and indicators. Various international and regional initiatives seek to improve the quality and availability of the data and indicators to inform policymaking." ### Danmarks Nationalbank (DN) activities and assessments - DN's publication history and focus: - "DN published its first report on the impacts of climate change on macroeconomic and financial stability in December 2019 (DN, 2019), followed by ... transitional risk stress testing (DN, 2020) and flood risk assessment (DN, 2021; DN, 2022)." - "More recently, DN has focused on risk identification and mapping, indicator development, and developing new methodologies for analyzing financial risks related to climate change and the green transition, aligning with initiatives by other central banks in advanced economies, including the European Central Bank (ECB)." - Risk identification and mapping: - DN (2024a) "outlines a mapping of climate-related events that could adversely impact the exposures of credit institutions ... includes identification of events related to climate change and the green transition (e.g., severe weather events, the implementation of carbon taxes), qualitative assessments of their impact on economic sectors (such as real estate, households, corporates, and financial markets), and the financial implications for credit institutions (including credit, market, and liquidity risks). The mapping exercise focuses on events that may create significant risks for credit institutions over the next 10 years." - Indicator development: - "DN has developed a set of green transition indicators for financial sector investments in listed equities, corporate bonds, and Danish mortgage bonds." - "These indicators show that the weighted average carbon intensity (WACI)—which measures the average carbon intensity of portfolio exposures—has declined in recent years." - New analytical methodology: - "DN is developing a new analytical methodology to assess risks to the Danish economy and financial system arising from the green transition (DN, 2024b). In collaboration with the Danish Research Institute for Economic Analysis and Modelling (DREAM), DN uses the GreenREFORM model to assess the impacts of selected risk scenarios on economic and financial stability." - "DN (2025) indicates that, although some credit institutions are more vulnerable, they are well prepared to withstand losses resulting from the carbon tax on agriculture." *Italic: Source: Annex V. Climate Change Risks and Data Gaps in the Financial Sector (from the provided IMF content)* ### 3. The Danish Financial Services Authority (DFSA) is addressing climate change risks ### 1dnkea2025001-print-pdf - 3. The Danish Financial Services Authority (DFSA) is addressing climate change risks ### DFSA actions and supervisory framework - In June 2022, the DFSA conducted a self-assessment of climate change risks across credit institutions, insurance companies, and pension funds; results highlighted uncertainties in data, models and scenarios that hindered comparability. - In 2023, the DFSA issued an executive order on risk management for credit institutions, requiring banks to incorporate climate-related risks into their credit risk assessments and associated internal processes. - The DFSA monitors climate change risks through the supervisory review process. - The DFSA has expanded internal procedures to improve verification of quantitative data and strengthened validation of supervisory reporting (see Annex VI implementation entries: “Implemented” for verification and validation improvements). ### Systemically Important Banks (SIBs), DN, and disclosure practices - DN and DFSA have been enhancing analytical and supervisory capacity on climate risks and focusing on credit institutions’ risk management and disclosure practices. - SIBs are: - Enhancing climate risk modeling. - Working to incorporate risk assessments into disclosures. - Evaluating vulnerability of residential and commercial real estate portfolios to physical risks, particularly floods and rising sea levels. - Assessing transition risks by analyzing potential implications of carbon taxes. - Pillar 3 disclosures indicate: - Significant challenges related to risk measurement, coverage of climate and transition events, data availability and quality, which hinder comparability. - Limitations in emissions data, particularly for nonfinancial corporations and agricultural emissions, and in energy performance certificates for properties. - Small and mid-sized banks are still developing their frameworks. ### Key findings on data gaps and risks - Data, model, and scenario uncertainties impede comparability of climate risk assessments across institutions. - Emissions data limitations are especially acute for: - Nonfinancial corporations. - Agricultural emissions. - Energy performance certificate coverage for properties is limited. - Flood-related damages in Denmark may increase and could exceed those of many other European countries under high-emissions scenarios (see Fornino and others (2024) and reference to SSP5–8.5). ### Policy recommendations and priorities - Continue improving source data, indicators and disclosures. - DN could broaden climate-related macro-level indicators beyond existing emission indicators for listed equities, corporate bonds, and Danish mortgage bonds; ECB indicators could provide a foundation. - Specific indicator development priorities: - Green transition indicators: - DN is focused on developing emission indicators for the loan portfolio to track carbon intensity trends of loans (loan portfolio constitutes a significant portion of banking sector exposures). - Physical risk indicators: - DN could develop and publish physical risk indicators (e.g., forward-looking damage estimates) on its website, analogous to green transition indicators. - Climate risk assessment of NBFIs: - Given substantial size of NBFIs, DN could prioritize macro-level indicators tailored to NBFI-specific risks (e.g., underwriting). - Pillar 3 disclosures need improvement: - SIBs are collaborating (notably via “e-nettet”) to close climate change data gaps and facilitate data sharing. - The DFSA could provide additional guidance to SIBs (e.g., hazards and transition event coverage) to reduce divergence in Pillar 3 disclosures and enhance comparability. ### Annex: List of ECB Carbon Emission and Physical Risk Indicators and availability for Denmark (summary) - Carbon Emission indicators: - Financed emissions: Available for listed equities, corporate bonds, and Danish mortgage bonds. - Weighted average carbon intensity: Available for listed equities and corporate bonds. - Physical risk indicators (not available for Denmark in the table): - Risk scores: Not available. - Potential exposure at risk: Not available. - Normalized exposure at risk (NEAR): Not available. - Collateral-adjusted exposure at risk: Not available. - Note: The ECB indicators are available on the ECB website for 19 countries; sustainable finance indicators are not covered in the table. ### Scenarios and referenced studies - SSP5–8.5 scenario referenced as a fossil fueled development with high emissions, resulting in severe global warming. - Fornino and others (2024): forward-looking economic loss estimates from floods and tropical cyclones indicating increased flood-related damages in Denmark. - Additional referenced studies and authorities include DN analyses (2019, 2020, 2021, 2022, 2024a, 2024b, 2025), ECB (2024), Financial Stability Board (2025), DTU (2024), and other academic studies. *Source: 1dnkea2025001-print-pdf - 3. The Danish Financial Services Authority (DFSA) is addressing climate change risks* ### Annex VII. Figure 2. Denmark: Data Standards Initiatives ### Annex VII. Figure 2. Denmark: Data Standards Initiatives ### Data provision status and timing (as of May 28, 2025) - Data Provision to the Fund: Publication under the Data Standards Initiatives through the National Summary Data Page. - Date of Latest Observation / Date Received entries (preserved as in source): - N28-May-25 28-May-25 D D D ......... - A _ Apr-25 May-25 M M M M 1W NLT 1W - N Apr-25 May-25 M M M M 2W NLT 1W - N Apr-25 May-25 M M M M 1M NLT 1M - N Apr-25 May-25 M M M M 2W NLT 1W - N Apr-25 May-25 M M M M 1M NLT 1M - N28-May-25 28-May-25 D D D ......... - N Apr-25 May-25 M M M M 1M NLT 2W - N 2024 Mar-25 A A M M 1/ Q Q 2Q/12M 12M - N 2024 Mar-25 A A M M 1M NLT 1M - N Apr-25 May-25 M M Q M 1Q NLT 1M - N Mar-25 May-25 M M Q M 1Q NLT 7W - N Mar-25 May-25 M M M M 8W 40D - N 2025 Q1 May-25 Q Q Q Q 1Q 60D - N 2024 Q4 Mar-25 Q Q Q Q 1Q 1Q - N 2024 Q4 Mar-25 Q Q Q Q 1Q 1Q - Data categories listed for dissemination: - Exchange Rates - International Reserve Assets and Reserve Liabilities of the Monetary Authorities - Reserve/Base Money - Broad Money - Central Bank Balance Sheet (including currency and maturity composition) - Consolidated Balance Sheet of the Banking System - Interest Rates (Both market-based and officially determined, including discount rates, money market rates, rates on treasury bills, notes and bonds) - Consumer Price Index - Revenue, Expenditure, Balance and Composition of Financing ‒ General Government (Foreign, domestic bank, and domestic nonbank financing; the general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments) - Revenue, Expenditure, Balance and Composition of Financing ‒ Central Government - International Investment Position - Stocks of Central Government and Central Government-Guaranteed Debt - External Current Account Balance - Exports and Imports of Goods and Services - GDP/GNP - Gross External Debt - Notes on data definitions and coverage: - Reserve assets include reserve assets pledged or otherwise encumbered, as well as net derivative positions. - Frequency and timeliness codes: (“D”) daily; (“W”) weekly or with a lag of no more than one week after the reference date; (“M”) monthly or with lag of no more than one month after the reference date; (“Q”) quarterly or with lag of no more than one quarter after the reference date; (“A”) annual; ("SA") semiannual; ("I") irregular; ("NA") not available or not applicable; and ("NLT") not later than. - Encouraged/required frequencies and timeliness are based on e-GDDS, SDDS, and SDDS Plus standards; flexibility options or transition plans under SDDS or SDDS Plus are not reflected. ### IMF membership, financial positions, and forthcoming payments (as of May 31, 2025) - Membership Status: Joined: March 30, 1946; Article VIII. - General Resources Account (SDR Million and Percent): - Quota 3,439.40 100.00 - Fund holdings of currency (Exchange Rate) 2,501.62 72.73 - Reserve Tranche Position 937.79 27.27 - SDR Department (SDR Million and Percent Allocation): - Net cumulative allocation 4,827.98 100.00 - Holdings 5,014.69 103.87 - 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): - Forthcoming 2026 2027 2028 2029 - Principal ... ... ... ... - Charges/Interest 0.02 0.02 0.02 0.02 - Total 0.02 0.02 0.02 0.02 ### Exchange rate arrangement and related institutional information - Currency: Danish krone. - De jure and de facto exchange rate arrangement: a conventional pegged arrangement. - Formal framework: European Exchange Rate Mechanism (ERM II). - ERM II central rate: DKr 746.038 per 100 euro. - Standard width of fluctuation band in ERM II: +/- 15 percent. - Agreed narrower fluctuation band with ECB and euro area member states: +/- 2.25 percent. - Resulting permissible krone range: between DKr 762.824 per 100 euro and DKr 729.252 per 100 euro. - Denmark has accepted the obligations under Article VIII, Sections 2, 3, and 4 and maintains an exchange system free of multiple currency practices and restrictions on the making of payments and transfers for current international transactions, apart from those imposed solely for the preservation of national or international security, as notified to the Fund by the National Bank of Denmark in accordance with Executive Board Decision No. 144-(52/51). ### Article IV consultation and outreach (timing and activities) - Last Article IV consultation concluded by the Executive Board on September 13, 2024. - Staff report (IMF Country Report No. 24/292) published with Press Release No. 24/327 (September 13, 2024). - Outreach: The team met with representatives of the private sector, academics, labor and financial institutions. - Press Conference: None. - Publication: The staff report will be published. - Technical Assistance: None. - Resident Representative: None. *Source: Annex VII. Figure 2. Denmark: Data Standards Initiatives; Denmark — Staff Report for the 2025 Article IV Consultation — Informational Annex (as of May 28, 2025 and May 31, 2025).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2025/english/1dnkea2025001-print-pdf.pdf_