Denmark: Staff Concluding Statement of the 2025 Article IV Mission
IMF News, May 13, 2025
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- Published: May 13, 2025
Key messages and policy priorities
- Denmark’s strong growth has continued, primarily driven by pharmaceutical exports, while domestic demand has remained relatively sluggish.
- Policy priorities:
- Uphold fiscal sustainability amid rising defense and aging-related expenditures.
- Ensure financial stability by vigilantly monitoring risks, maintaining a prudent capital-based macroprudential policy setting, and tightening borrower-based measures.
- Further intensify structural reforms to support high levels of income and sustain the welfare state.
Economic outlook and risks
- Staff projections:
- GDP growth: decline from 3.7 percent in 2024 to 2.9 percent in 2025 and further to 1.8 percent in 2026.
- Medium-term growth: projected at around 1.5 percent beyond 2026.
- Inflation: anticipated to stay around 2 percent.
- External and domestic drivers:
- Export growth, including pharmaceutical exports, is expected to slow.
- Full reopening of the Tyra natural gas and oil field will provide a temporary uplift.
- Domestic demand: expected to gradually strengthen, driven by increased public expenditures and a modest recovery in private consumption due to improved consumer purchasing power.
- Trade exposure and risks:
- Exports produced in Denmark passing through customs account for only 3 percent of total exports, limiting the direct impact of U.S. tariffs on the Danish economy.
- Downside risks dominate: reversal of globalization, higher trade barriers, deepening geoeconomic fragmentation, and intensification of regional conflicts could dampen confidence and domestic demand.
- Upside risks: faster-than-expected resolution of trade and geopolitical tensions and stronger pharmaceutical exports.
Maintaining fiscal sustainability amid rising defense and aging-related spending
- Announced fiscal changes:
- Temporary rise in defense spending from 2¼ percent of GDP in 2024 to 3¼ percent in 2025 and 2026, returning to 2¼ percent by 2033.
- Planned personal income tax cuts and increased expenditures related to health, long-term care, and climate.
- Fiscal balance projections:
- Overall surplus: projected to fall from 4½ percent of GDP in 2024 to 1¼ percent in 2025 and further to ½ percent of GDP in 2026.
- Structural balance: expected to remain above the -1 percent of GDP floor over the medium term in the staff’s baseline scenario.
- Public debt and fiscal space:
- Debt-to-GDP ratio: reduced to below 30 percent, down from nearly 50 percent a decade ago.
- A significantly higher-than-expected fiscal surplus in 2024 provides additional room to accommodate increased defense spending.
- Policy recommendations if spending pressures persist:
- Prioritize spending measures over revenue measures, given the already high tax burden.
- Conduct an in-depth assessment of expenditures to identify low-priority or inefficient spending and opportunities to enhance public administration efficiency via digitalization and AI.
- Vigorously pursue structural reform programs to boost labor supply and enhance productivity; further raise the retirement age in line with improved life expectancy.
- Respect the structural balance floor of -1 percent of GDP under current national fiscal rules.
- Continue robust spending controls and save any revenue above budget forecasts for the remainder of 2025.
Safeguarding financial stability
- Current assessment:
- Systemic risks have been contained; banks are well-capitalized with strong profitability, asset quality, and liquidity.
- Recommended supervisory and regulatory actions:
- Ensure banks maintain robust provisioning practices for credit risks, including a thorough examination of IFRS 9 modeling practices.
- Complete the ongoing review of internal ratings-based models promptly, followed by supervisory actions, and implement the EU’s CRR III/CRD VI as planned.
- Continue efforts to enhance resilience against cyberattacks.
- Ensure the Financial Supervisory Authority is adequately staffed across a full range of skills and experiences.
- Macroprudential stance and borrower-based measures:
- Maintain the 2.5 percent countercyclical capital buffer (CCyB) and the 7 percent sector-specific systemic risk buffer, introduced in June 2024 to mitigate risks in the CRE sector.
- Consider lowering the maximum loan-to-value ratio below the current 95 percent to address pockets of vulnerabilities in mortgages.
- Reduce incentives for bigger mortgages by lowering the tax deductibility of mortgage interest expenses.
- Non-bank financial institutions (NBFIs):
- Continue strengthening the oversight framework for NBFIs given their considerable size and interconnectedness.
- Priorities include:
- Finalizing the supervisory order on the stress-testing framework for insurance and pension firms.
- Developing a framework for systemic risk assessment that covers both banks and NBFIs.
- Ensuring insurance and pension companies provide clear advice to clients about financial and longevity risks when selling non-guaranteed products.
- Outstanding Financial Stability Assessment Program recommendations:
- Important outstanding recommendations relate to systemic risk oversight and the governance of the resolution authorities.
Pursuing structural reforms
- Rationale:
- Intensify structural reforms to sustain high levels of income, preserve fiscal space, and sustain the welfare state amid potential shifts in globalization and an aging population.
- Entrepreneurship, digitalization, and AI:
- Strengthen policies to support entrepreneurship while harnessing digitalization and AI.
- Staff welcomes the new entrepreneurship strategy launched in June 2024 to support start-ups and scale-ups.
- Continue reviewing legal and technical barriers to AI adoption while ensuring sound ethical principles.
- Monitor implications of digital technologies on labor markets, including job displacement.
- Labor supply and skills:
- Continue efforts to ensure sufficient labor supply with skills in IT, health, and long-term care.
- Ongoing initiatives include:
- Reforming education curricula to equip students with digitalization skills.
- Enhancing vocational education and training.
- Making the active labor market policy framework more cost-effective while maintaining the strengths of the Danish flexicurity model.
- Other priorities:
- Align foreign worker recruitment schemes, especially the salary requirement limit and the positive list, with labor market needs.
- Ensure effectiveness of integration programs to help foreign workers and families integrate into Danish society.
- EU single market and domestic regulation:
- A deeper EU single market could boost Denmark’s business dynamism and potential growth; deepening EU integration would enhance economies of scale and network effects.
- Reduce domestic regulatory burdens on businesses (e.g., reporting requirements) while balancing costs and benefits.
- Support multilateral and transparent trade policies that promote mutually beneficial cooperation in global trade, knowledge, and investment flows.
- Climate adaptation:
- Strengthen climate adaptation due to vulnerability 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, including financing responsibilities among central and local governments and the private sector.
- Authorities are encouraged to reform the property insurance scheme (“Storm Surge Scheme”) to make insurance premiums risk-based.
Mission acknowledgements
- The mission thanks the authorities and private sector counterparts for accommodative flexibility, warm hospitality, and candid and high-quality discussions.
- The IMF team is especially grateful to Danmarks Nationalbank for assistance with meetings and logistical arrangements.
Staff Concluding Statement of the 2025 Article IV Mission — Denmark