IMF Executive Board Concludes 2017 Article IV Consultation with Denmark

June 20, 2017

On June 16, 2017 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Denmark [1]

The Danish economy has recovered and is approaching potential, even as growth in recent years has been markedly slower than before the crisis. Unemployment is low and close to its estimated structural level, and capacity constraints are gradually starting to bind in some sectors. While CPI inflation has remained subdued, house prices continue to rise fast in segments of the market. The coincidence of low output growth and increasingly binding constraints highlights Denmark’s reduced growth potential, reflecting structurally weak productivity growth and low domestic investment levels. After five years of negative interest rates, the banking system remains sound and profitable.

The outlook is for continued moderate growth, projected at 1.5 percent in 2017 and 1.7 percent in 2018. Activity is expected to be driven by strong and increasingly balanced private demand. Low interest rates and the buoyant housing market should continue to support private consumption. Investment is forecast to continue its rebound as corporates’ balance sheet repair progresses and the need to alleviate domestic capacity constraints becomes more prominent. As the economy continues to operate at a level close to capacity, inflation should gradually rise.

These forecasts are subject to substantial risks. Domestically, increasing labor shortages could undermine medium-term growth prospects, although sustained increases in labor participation could help mitigate such pressures. Continued house price rises would further increase households’ exposure to shocks, including from rising interest rates. External risks include lower-than-expected growth in the euro area and rising political and geopolitical uncertainties, which could negatively impact the Danish economy. However, greater-than-expected gains in consumer and business confidence abroad could help support growth.

Executive Board Assessment [2]

The Executive Directors welcomed the steady momentum in the Danish economy and the strong labor market performance, but noted that growth has remained slow and output is approaching potential. They concurred that policy efforts should focus on alleviating capacity constraints, raising potential growth, and bolstering resilience to shocks.

They agreed it would be appropriate to slow the pace of fiscal consolidation somewhat to facilitate tax cuts, provided that strong new labor market reforms are also implemented to raise labor supply. They recommended shifts in the composition of fiscal outlays towards productive public investment to help raise growth potential. Directors believed that a tighter fiscal stance would be needed if growth turned out substantially stronger than expected. Directors agreed that monetary policy should focus on maintaining the peg, and continue to normalize interest rates as conditions allow.

Against the backdrop of ongoing rapid house price increases in urban areas and high household debt levels, Directors welcomed the recently agreed property tax reform to end the current procyclical valuation freezes. While also welcoming the Systemic Risk Council’s debt‑to‑income limit proposal, they considered that the limit could be broadened to cover all loans, irrespective of their terms, with tighter limits for interest‑only loans and variable rate instruments. Directors called for further policy action to contain risks from the housing market, including by introducing amortization requirements; raising the down payment requirement; further reducing mortgage interest deductibility; and easing regulations that constrain housing supply.

Directors commended the authorities for the good progress on upgrading the financial regulatory framework. They welcomed the MOUs with Nordic neighbors on systemic branches, and urged the authorities to implement them and evaluate their effectiveness after one year. Directors underscored the importance of strengthening the independence of the financial supervisor (DFSA), including by lengthening the terms of its board members.

Directors concurred that unlocking labor supply is a key challenge for Denmark. They emphasized the need to follow through on education and pension reforms to promote labor participation among young and relatively older individuals. Directors suggested eliminating unemployment benefits for new graduates to help promote faster job entry, while enhancing the integration of migrants would also help increase labor supply.

Directors called for further reforms to liberalize product markets and raise investment. They recommended the authorities introduce an incremental Allowance for Corporate Equity (ACE) to reduce the debt bias in the tax system, and to promote knowledge‑related investment through direct funding or tax credits. Directors welcomed the liberalization of the Planning Act and the new utilities strategy. They suggested further relaxing strict regulations in retail trade and some network sectors to further boost competition and productivity growth.

Directors broadly agreed that the external position is stronger than implied by fundamentals, while recognizing that this assessment is subject to important uncertainties. They noted that recommended policies to slow fiscal consolidation and raise private and public investment would help reduce the current account surplus.

Denmark: Selected Economic and Social Indicators, 2013–18

2013

2014

2015

2016

2017

2018

proj.

proj.

Supply and Demand (change in percent)

Real GDP

0.9

1.7

1.6

1.3

1.5

1.7

Final domestic demand

0.7

1.3

1.6

2.1

2.0

2.0

Private consumption

0.3

0.5

1.9

1.9

2.3

2.5

Public consumption

-0.1

1.2

0.6

-0.1

0.2

0.2

Gross fixed investment

2.7

3.5

2.5

5.2

3.8

3.0

Net exports 1/

0.2

0.3

0.4

-0.2

-0.2

-0.2

Gross national saving (percent of GDP)

27.4

28.9

28.9

28.2

28.0

27.8

Gross domestic investment (percent of GDP)

19.7

20.0

19.8

20.1

20.4

20.5

Potential output

0.7

1.0

1.5

1.4

1.5

1.5

Output gap (percent of potential output)

-0.9

-0.2

-0.2

-0.3

-0.2

0.0

Labor Market (change in percent) 2/

Labor force

-0.3

0.4

1.2

3.0

0.6

0.7

Employment

0.3

0.9

1.6

3.2

1.0

0.7

Harmonized unemployment rate (percent)

7.0

6.5

6.2

6.2

5.8

5.8

Prices and Costs (change in percent)

GDP deflator

0.9

0.8

0.9

0.4

1.7

1.6

CPI (year average)

0.8

0.6

0.5

0.2

0.6

1.1

Public Finance (percent of GDP) 3/

Total revenues

54.8

56.7

53.5

52.7

51.8

51.7

Total expenditures

55.8

55.3

54.8

53.6

53.7

52.6

Overall balance

-1.0

1.4

-1.3

-0.9

-1.9

-0.9

Primary balance 4/

-0.8

1.7

-0.8

-0.8

-1.4

-0.4

Cyclically-adjusted balance (percent of potential GDP)

-0.4

1.6

-1.2

-0.7

-1.7

-0.9

Structural balance (percent of potential GDP) 5/

-1.3

-1.7

-1.1

-0.4

-0.6

-0.3

Gross debt

44.0

44.0

39.6

37.8

38.4

38.1

Money and Interest Rates (percent)

Domestic credit growth (end of year)

0.6

0.7

0.1

1.6

M3 growth (end of year)

-1.7

12.6

12.2

-4.1

Short-term interbank interest rate (3 month)

0.3

0.3

-0.1

-0.1

Government bond yield (10 year)

1.8

1.3

0.7

0.1

Balance of Payments (percent of GDP)

Exports of goods & services

54.8

54.5

55.2

53.1

54.7

54.8

Imports of goods & services

48.2

47.6

47.8

46.2

47.8

48.2

Trade balance, goods and services

6.6

7.0

7.4

6.9

6.9

6.3

Oil trade balance

-0.1

-0.2

-0.1

-0.2

-0.4

-0.6

Current account

7.8

8.9

9.2

8.1

7.6

7.3

International reserves, changes

-0.3

-2.1

-1.2

0.7

Exchange Rate

Average DKK per US$ rate

5.6

5.6

6.7

6.7

Nominal effective rate (2010=100, ULC based)

98.7

99.6

96.5

97.6

Real effective rate (2010=100, ULC based)

94.9

96.5

94.1

96.5

Memorandum Items

Nominal GDP (Bln DKK)

1930

1977

2027

2061

2128

2200

GDP (Bln USD)

344

352

301

306

GDP per capita (USD)

61326

62606

53237

53641

Sources: Danmarks Nationalbank, Eurostat, IMF World Economic Outlook, Statistics Denmark, and Fund staff calculations.

1/ Contribution to GDP growth.

2/ Based on Eurostat definition.

3/ General government.

4/ Overall balance net of interest.

5/ Cyclically-adjusted balance net of temporary fluctuations in some revenues (e.g., North Sea revenue, pension yield tax revenue) and one-offs.




[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 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

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