IMF Staff Completes 2019 Article IV Mission to Denmark

IMF News, May 13, 2019

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Press Release No. 19/159
Date: May 13, 2019
IMF staff team led by Mr. Miguel Segoviano visited Copenhagen during April 30-May 13, 2019 to conduct discussions on the 2019 Article IV consultation.
The views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
The IMF Executive Board is expected to discuss Denmark’s economic developments and policies on June 17, 2019. A staff report is expected to be published soon afterwards.

“Denmark’s economic performance, based on a model that prizes social inclusion, continues to impress with high living standards.”
Growth projections:
- 2019: 1.7 percent
- 2020: 1.9 percent
Current drivers: Private consumption and investment expected to be the key drivers of growth, with financial conditions remaining accommodative and the fiscal stance broadly neutral for some time.
Potential output growth:
- From 1.4 percent in 2016
- Projected to increase to 1.8 percent over the medium term (as a result of structural reforms and higher investment).
Inflation and wages are expected to gradually rise.

Key downside risks:
- A sharper than expected slowdown in Denmark’s main trading partners could slow export growth.
- A disorderly Brexit could weigh on the economy, notably through trade and supply chain disruptions.
- High household debt amid elevated house valuations.
- The ongoing money laundering case could further affect confidence in the financial sector and undermine financial stability.
Banking system: profitable, liquid and solvent, but pockets of vulnerabilities remain; lending surveys suggest some banks are relaxing credit standards for corporate loans.

“Denmark’s public finances are sound with substantial fiscal space in the medium term.”
Recommended fiscal approach:
- Fiscal stance should remain neutral, while letting automatic stabilizers operate fully.
- In the event of a severe downturn, consider additional temporary loosening, while remaining anchored to the medium-term objective.
- Implement efficiency-improving reforms that cover both revenues and expenditures; these could be fiscally-neutral or designed to provide stimulus if loosening is warranted.

To strengthen financial resilience, consider a combination of micro- and macroprudential tools to increase capital buffers, in addition to the Counter Cyclical Capital Buffer, if risks continue to build up.
Bank vulnerabilities noted: potential relaxation of corporate loan credit standards.

Authorities should build upon recent efforts to strengthen cross-border AML/CFT supervision.
Priority next steps:
- (i) Develop a comprehensive institutional risk assessment model;
- (ii) Increase the depth of the DFSA’s AML/CFT on-site inspections;
- (iii) Further expand its sanctioning powers, including so as to enable it to levy administrative fines;
- (iv) Strengthen international cooperation.

The housing market is the major link between the economy and the financial sector.
Vulnerabilities: high household leverage amid elevated house valuations.
Recommended measures:
- Enhance the macroprudential toolbox;
- Reduce overly favorable tax incentives;
- Implement policies to promote housing supply.

Labor market is strong, with pressures gradually building in some sectors.
Recommended measures:
- Increase benefits to low-income workers to help alleviate inactivity traps and promote youth employment.
- Reduce labor tax rates to increase hours worked.
- Further incentivize upgrading of technical and digital skills, integrate migrants, and attract skilled foreign labor.

Productivity growth remains weak, partly because of lower investment rates following the crisis.
Recommended measures to boost investment and innovation:
- Consider making R&D expenditures fully refundable to incentivize innovation among a larger spectrum of firms.
- Address the debt bias and improve access to equity finance for SMEs to promote investment and help reduce the current account surplus.
- Streamline and strengthen the complex Danish institutional framework for competition.

IMF Staff statement at the conclusion of the April 30-May 13, 2019 Article IV mission to Denmark.