On June 22, 2016 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Denmark. 1
Economic performance has been relatively weak for an extended period, notably on account of low productivity growth that has lagged peers. Recently, a trend decline in oil and gas production has also started to weigh on output. Moreover, Denmark was hard hit by the 2008/09 global crisis, which coincided with the puncture of a local housing bubble. The initial recovery was interrupted by renewed weakness in 2012–13, broadly following developments in the neighboring euro area to which the Danish economy is closely tied. A moderate recovery resumed from 2014.
The outlook is for a gradual further recovery. Supported by low interest rates and oil prices, private consumption will continue to be the main driver for growth in the short term. However, investment is also projected to pick up, reflecting the diminishing impact of firm deleveraging and the strong recovery in the housing market. Export growth is likely to remain low, in line with the weak external environment. On these trends, the economy is forecast to grow by 1.3 percent in 2016 and 1.6 percent in 2017. Inflation is expected to remain subdued in 2016, reflecting lower oil prices, but then rise steadily, reaching 2 percent in the outer years reflecting a tightening labor market and a closing output gap.
Risks are tilted to the downside. A sharper than expected slowdown in Europe or in emerging markets could derail the recovery given Denmark’s deep integration in the world economy. Also, in view of exceptionally high household debt and a high share of adjustable rate mortgages, volatility in global financial conditions leading to a spike in market interest rates could abruptly raise households’ debt service and depress consumption. The disruption of trade and financial flows that would likely accompany a “Brexit” compounds these risks. Domestically, an unchecked continuation of rapid house price increases would heighten the risk of a correction over the medium term.
Executive Board Assessment 2
Noting the extended period of relatively weak growth and the considerable downside risks to the outlook, Executive Directors encouraged the authorities to build on a strong track record of sound policies to help sustain the economic recovery, reduce financial sector vulnerabilities, and raise growth prospects.
Considering Denmark’s moderate public debt level and the absence of an independent monetary policy, Directors broadly supported plans for a gradual fiscal consolidation while allowing flexibility for fiscal policy to act as the main stabilizer of cyclical fluctuations. They emphasized that if downside risks materialize automatic stabilizers should be allowed to operate and short-term fiscal support would be warranted. Conversely, they considered that a faster fiscal tightening may be needed if the recovery gathered pace faster than expected. Directors agreed that monetary policy should continue to focus on maintaining the exchange rate peg.
Directors noted that rapid price increases in segments of the housing market together with high household indebtedness could pose macroeconomic and financial stability risks. They therefore welcomed the recent measures that are expected to restrain mortgage lending, and the strengthened risk management guidance for lenders. However, Directors believed more should be done to mitigate medium-term risks, and encouraged the authorities to strengthen the macroprudential toolbox and to consider introducing debt-to-income limits as well as reducing the tax deductibility of mortgage interest payments. They also encouraged efforts to alleviate supply constraints and ease tight rental market regulations. Directors called on the authorities to end the procyclical valuation freezes for land and property taxes.
Directors commended the authorities for the good follow up on the 2014 FSAP advice, and encouraged implementation of the remaining recommendations. In particular, they suggested measures to strengthen the operational independence of the financial supervisor (DFSA). Given the interconnectedness of the Nordic banking system, Directors welcomed the ongoing efforts to enhance regional cooperation on financial stability issues and underscored the importance of reaching strong agreements on information sharing, cross-border supervision, depositor protection, and resolution arrangements.
Directors welcomed the government’s growth package, including plans to devise a new strategy for selected network sectors and to liberalize the Planning Act. They also encouraged reforms to strengthen competition and increase firm productivity, including by reducing product market regulation particularly in retail trade and some network sectors.
Directors welcomed the new tripartite agreement on integration of migrants, but stressed that implementation will need to be closely monitored. They urged the authorities to consider lifting restrictions on accepting regular work while asylum requests are being processed and starting integration programs earlier for asylum seekers whose requests have a high probability of success.
| Denmark: Selected Economic and Social Indicators, 2013–21 | |||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | |
| est. | proj. | proj. | proj. | proj. | proj. | proj. | |||
|
Supply and Demand (change in percent) |
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|
Real GDP |
-0.2 | 1.3 | 1.2 | 1.3 | 1.6 | 1.8 | 1.8 | 1.9 | 1.8 |
|
Final domestic demand |
0.0 | 1.0 | 1.5 | 1.5 | 1.8 | 2.0 | 2.0 | 2.0 | 2.0 |
|
Private consumption |
-0.1 | 0.5 | 2.1 | 2.1 | 2.4 | 2.5 | 2.5 | 2.5 | 2.5 |
|
Public consumption |
-0.7 | 0.2 | 0.9 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 | 0.2 |
|
Gross fixed investment |
1.1 | 3.4 | 0.8 | 2.0 | 2.5 | 3.0 | 3.0 | 3.0 | 2.8 |
|
Net exports 1/ |
-0.1 | 0.1 | 0.1 | -0.2 | -0.1 | -0.1 | -0.1 | 0.0 | 0.0 |
|
Gross national saving (percent of GDP) |
26.6 | 27.6 | 26.3 | 26.0 | 26.0 | 26.0 | 26.0 | 26.1 | 26.1 |
|
Gross domestic investment (percent of GDP) |
18.9 | 19.1 | 19.0 | 19.1 | 19.1 | 19.3 | 19.4 | 19.6 | 19.7 |
|
Potential output |
0.6 | 0.7 | 1.0 | 1.0 | 1.4 | 1.6 | 1.5 | 1.9 | 1.8 |
|
Output gap (percent of potential output) |
-1.7 | -1.2 | -1.0 | -0.7 | -0.5 | -0.3 | 0.0 | 0.0 | 0.1 |
|
Labor Market (change in percent) 2/ |
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|
Labor force |
-0.3 | 0.5 | 1.1 | 0.5 | 0.6 | 0.7 | 0.8 | 0.8 | 0.8 |
|
Employment |
0.2 | 1.0 | 1.5 | 0.7 | 0.8 | 0.7 | 0.9 | 0.8 | 0.8 |
|
Harmonized unemployment rate (percent) |
7.0 | 6.5 | 6.2 | 6.0 | 5.8 | 5.8 | 5.7 | 5.7 | 5.7 |
|
Prices and Costs (change in percent) |
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|
GDP deflator |
1.4 | 0.8 | 1.0 | 0.7 | 1.8 | 2.0 | 2.3 | 2.4 | 2.3 |
|
CPI (year average) |
0.8 | 0.6 | 0.5 | 0.7 | 1.2 | 1.4 | 1.8 | 2.0 | 2.0 |
|
Public Finance (percent of GDP) 3/ |
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|
Total revenues |
55.5 | 57.4 | 53.6 | 51.1 | 50.0 | 49.7 | 49.5 | 49.4 | 49.4 |
|
Total expenditures |
56.5 | 56.0 | 55.7 | 53.5 | 51.9 | 51.4 | 51.0 | 50.6 | 50.4 |
|
Overall balance |
-1.1 | 1.5 | -2.1 | -2.3 | -1.9 | -1.7 | -1.5 | -1.2 | -1.0 |
|
Primary balance 4/ |
-0.9 | 1.6 | -1.4 | -1.6 | -1.3 | -1.4 | -1.3 | -1.0 | -0.8 |
|
Cyclically-adjusted balance (percent of potential GDP) |
0.2 | 2.4 | -1.3 | -1.8 | -1.5 | -1.5 | -1.5 | -1.2 | -1.1 |
|
Structural balance (percent of potential GDP) 5/ |
-0.9 | -1.4 | -1.1 | -0.9 | -0.9 | -0.8 | -0.7 | -0.5 | -0.4 |
|
Gross debt |
44.6 | 44.6 | 45.8 | 47.2 | 47.5 | 47.5 | 47.1 | 46.3 | 45.5 |
|
Money and Interest Rates (percent) |
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|
Domestic credit growth (end of year) |
0.6 | 0.7 | 0.0 | … | … | … | … | … | … |
|
M3 growth (end of year) |
-1.7 | 12.6 | 11.9 | … | … | … | … | … | … |
|
Short-term interbank interest rate (3 month) |
0.3 | 0.3 | -0.1 | … | … | … | … | … | … |
|
Government bond yield (10 year) |
1.8 | 1.3 | 0.7 | … | … | … | … | … | … |
|
Balance of Payments (percent of GDP) |
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|
Exports of goods & services |
53.9 | 53.4 | 53.4 | 52.4 | 54.2 | 55.7 | 57.1 | 58.3 | 59.5 |
|
Imports of goods & services |
47.8 | 47.3 | 47.1 | 46.8 | 48.8 | 50.4 | 51.9 | 53.2 | 54.6 |
|
Trade balance, goods and services |
6.0 | 6.1 | 6.3 | 5.6 | 5.5 | 5.3 | 5.2 | 5.1 | 4.9 |
|
Oil trade balance |
-0.1 | -0.2 | -0.2 | -0.3 | -0.5 | -0.6 | -0.8 | -0.9 | -1.1 |
|
Current account |
7.1 | 7.7 | 6.9 | 6.5 | 6.4 | 6.2 | 6.1 | 6.0 | 5.8 |
|
International reserves, changes |
-0.3 | -2.1 | -1.2 | … | … | … | … | … | … |
|
Exchange Rate |
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|
Average DKK per US$ rate |
5.6 | 5.6 | 6.7 | … | … | … | … | … | … |
|
Nominal effective rate (2010=100, ULC based) |
98.7 | 99.5 | 96.5 | … | … | … | … | … | … |
|
Real effective rate (2010=100, ULC based) |
99.1 | 101.3 | 99.6 | … | … | … | … | … | … |
| Social indicators (Reference year) | |||||||||
| GDP per capita, USD (2013): $59,129; At-risk-of-poverty rate (2012): 19.0 percent. | |||||||||
|
Sources: Denmark’s National bank, Eurostat, IMF World Economic Outlook, Statistics Denmark, World Bank WDI, and Fund staff calculations. |
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1/ Contribution to GDP growth. |
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2/ Based on Eurostat definition. |
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3/ General government. |
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4/ Overall balance net of interest. |
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5/ Cyclically-adjusted balance net of temporary fluctuations in some revenues (e.g., North Sea revenue, pension yield tax revenue) and one-offs. |
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1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summing up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
2 At the conclusion of the discussion, the Managing Director, as a Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.
