IMF Executive Board Concludes 2021 Article IV Consultation with Denmark

IMF News, June 15, 2021

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Published: June 15, 2021

Overview

On June 14, 2021, the IMF Executive Board concluded the Article IV consultation with Denmark and endorsed the staff appraisal without a meeting.
Denmark entered the pandemic on a strong economic footing and used large policy space to navigate the crisis.
Real GDP declined in 2020, driven mainly by weak private consumption and net exports; the contraction was one of the smallest in Europe.
Swift and sizable fiscal measures cushioned the impact on activity; fiscal policy continues to support the recovery and public debt is sustainable.
Unprecedented policy measures supported the labor market; unemployment increased only slightly.
The current account surplus declined mainly due to lower services’ exports but remains high.
Macrofinancial vulnerabilities largely stem from accelerating housing price growth amid high and increasing household leverage.

Near-term Outlook and Projections

Recovery assumptions: continued vaccine rollout and increased availability by the second half of 2021; lifting of restrictions.
Output growth projections:
- 2021: 2.6 percent
- 2022: 3.3 percent
Drivers: recovery of private consumption and net exports; investment momentum expected to strengthen in 2022 due to initiatives incentivizing green investment and digitalization.
Labor market: continued improvement supporting wages.
Output gap: negative output gap estimated to close by 2022.
Potential growth: expected to pick up in the medium term, limiting scarring from the pandemic.

Executive Board Assessment

Activity: Declined in 2020 but milder than peers due to policy support.
External position: Stronger than level consistent with medium-term fundamentals and desirable policies.
Risks: Near-term outlook dominated by pandemic developments; high and increasing household debt amid accelerating housing valuations is a key vulnerability.
Policy priorities: Support the recovery, safeguard vulnerable groups, enhance macrofinancial resilience, and facilitate green and digital transitions.

Fiscal Policy and Public Finances

Denmark’s public finances described as sound with substantial fiscal space to support recovery and transformations.
Recommended fiscal stance:
- Prioritize COVID crisis support, facilitate reallocation, and support reforms for economic transformation.
- If the recovery falters, deploy fiscal space as needed.
- Once recovery is fully entrenched, plan to return to the medium-term objective of a neutral stance.
Recommendation to raise public investment as much as efficiently possible while complying with the Budget Law and the medium-term objective.
Call for prompt definition of the tax framework for green investment, including the level and base of carbon taxation to reduce uncertainty and incentivize private investments.

Financial Stability and Housing

Banking system: profitable, liquid, and highly capitalized though operating in a challenging environment.
Support measures for households and corporates mitigated liquidity and credit risks; impairments likely to increase once support is unwound.
As recovery solidifies, deploy targeted prudential tools to maintain financial stability.
AML/CFT: Staff welcome improvements leading to a third consecutive FATF upgrade; robust implementation of reforms should continue.
Housing and household leverage recommendations:
- Tighten prudential tools and deploy coordinated tax and housing supply policies.
- Shift focus toward income-based measures as LTV caps are less binding amid high house price growth.
- Tighten DTI restrictions for all loans irrespective of LTV ratios; DTI caps could be differentiated based on borrowers’ riskiness.
- Consider tighter limits on income-based measures for interest-only and floating-rate mortgages.
- Reduce mortgage interest deductibility consistent with the overall tax framework.
- Consider policies to promote housing supply.

Labor Market and Structural Policies

As recovery gains traction, shift from exceptional support to measures embedded in flexicurity.
Enhance flexicurity components that facilitate matching and reallocation of labor from contracting to expanding sectors through upskilling and education, especially for the young, unskilled, and foreign-born.
Sunset exceptional support once recovery is entrenched.
Continue implementation of the pension reform that links retirement age to life-expectancy to support long-term labor supply.
Consider measures to increase labor supply and alleviate inactivity traps, including a comprehensive tax reform using targeted in-work benefits.
Improve provision of after-hours public childcare.
Simplify certification of foreign degrees to attract skilled foreign labor.

Productivity, Investment, and Tax Reform

Recovery offers opportunity to address pre-pandemic legacies and boost productivity growth and investments.
Recommendations to boost productivity and investment:
- Raise public investment within fiscal rules.
- Foster environment for high productivity sectors, encourage broad-based innovation, and improve access to equity finance.
- Reduce the cap on the use of carry-forward losses to foster start-ups and high technology firms.
- Consider implementing an ACE to reduce the debt bias and the cost of capital.

Key Statistics and Selected Economic Indicators (2018–26)

Real GDP (change in percent): 2018: 2.2; 2019: 2.9; 2020: -2.7; 2021: 2.6; 2022: 3.3; 2023: 1.9; 2024: 1.8
Final domestic demand (change in percent): 2018: 2.5; 2019: 1.7; 2020: -0.5; 2021: 2.7; 2022: 2.3; 2023: 2.1
Private consumption (change in percent): 2018: 1.4; 2019: -1.9; 2020: 2.8; 2021: 3.6
Public consumption (change in percent): 2018: 0.3; 2019: 1.2; 2020: -0.1; 2021: 3.2; 2022: 0.1; 2023: 0.9
Gross fixed investment (change in percent): 2018: 4.8; 2019: 3.5; 2020: 3.7; 2021: 3.0
Net exports: 2018: -2.1; 2019: 0.2
Gross national saving (percent of GDP): 2018: 30.2; 2019: 31.6; 2020: 31.0; 2021: 30.8
Gross domestic investment (percent of GDP): 2018: 23.1; 2019: 22.7; 2020: 23.2; 2021: 23.0; 2022: 23.6; 2023: 23.7; 2024: 23.8; 2025: 23.9
Output gap (percent of potential output): 2018: -1.7; 2019: -1.0; 2020: 0.0
Labor force (change in percent): 2018: 1.5; 2019: -0.2; 2020: 0.4
Employment (change in percent): 2018: 1.6; 2019: -0.8; 2020: 0.6
Harmonized unemployment rate (percent): 2018: 5.1; 2019: 5.0; 2020: 5.6; 2021: 5.4; 2022: 5.2
GDP deflator (change in percent): 2018: 0.7
CPI (year average): 2018: 1.1; 2019: 2.0
Total revenues (percent of GDP): 2018: 51.2; 2019: 53.0; 2020: 52.8; 2021: 50.9; 2022: 50.2; 2023: 50.1; 2024: 49.7
Total expenditures (percent of GDP): 2018: 50.5; 2019: 49.2; 2020: 54.0; 2021: 54.3; 2022: 51.1; 2023: 50.7; 2024: 50.3
Overall balance (percent of GDP): 2018: 3.8; 2019: -1.1; 2020: -3.3; 2021: -0.9; 2022: -0.7; 2023: -0.6
Primary balance (percent of GDP): 2018: -1.5; 2019: -3.6; 2020: -1.3
Cyclically-adjusted balance (percent of potential GDP): 2018: -2.6
Structural balance (percent of potential GDP): 2018: -0.3; 2019: 0.5
Gross debt (percent of GDP): 2018: 33.8; 2019: 33.0; 2020: 42.2; 2021: 40.7; 2022: 41.2; 2023: 41.6; 2024: 41.8; 2025: 41.9
Domestic credit growth (end of year): 2018: 4.3
M3 growth (end of year): 2018: -2.9
Short-term interbank interest rate (3 month): 2018: -0.4
Exports of goods & services (percent of GDP): 2018: 56.3; 2019: 58.3; 2020: 55.7; 2021: 56.4; 2022: 56.5; 2023: 56.6
Imports of goods & services (percent of GDP): 2018: 50.4; 2019: 51.0; 2020: 47.9; 2021: 49.1; 2022: 50.0
Trade balance, goods and services (percent of GDP): 2018: 5.9; 2019: 7.4; 2020: 6.5; 2021: 6.7; 2022: 6.4; 2023: 6.3; 2024: 6.1
Current account (percent of GDP): 2018: 7.0; 2019: 8.9; 2020: 7.8; 2021: 7.7; 2022: 7.3; 2023: 7.2
Nominal GDP (Bln DKK): 2018: 2254; 2019: 2335; 2020: 2324; 2021: 2431; 2022: 2546; 2023: 2647; 2024: 2755; 2025: 2867; 2026: 2983
GDP (Bln USD): 2018: 357; 2019: 350
GDP per capita (USD): 2018: 61731; 2019: 60300

IMF Communications Department. Press Release No. 21/174. June 15, 2021. Executive Board concluded Article IV consultation with Denmark; Executive Directors endorsed staff appraisal under lapse-of-time procedure.