Press Release No. 25/236

IMF Executive Board Concludes 2025 Article IV Consultation with Denmark

July 3, 2025

• Strong growth has continued, primarily driven by pharmaceutical exports. Public finances and external positions are robust, and the financial system has demonstrated resilience to multiple shocks in recent years.
• Growth is expected to moderate in the near term as external demand weakens and the exceptional pharmaceutical expansion begins to normalize.
• The policy priority is to uphold fiscal sustainability amid rising defense and aging-related expenditures, ensure financial stability, and further intensify structural reforms to support high levels of income and sustain the welfare state.

Washington, DC: The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation[1] for Denmark and considered and endorsed the staff appraisal without a meeting on a lapse of time basis.[2]

Strong growth has continued, primarily driven by the expansion of pharmaceutical exports, while domestic demand has been relatively sluggish. Inflation has remained below 2 percent. Public finances and external positions are robust, and the financial system has demonstrated resilience to multiple shocks in recent years.

Output growth is expected to moderate from 3.7 percent in 2024 to 3.0 percent in 2025 and further to 1.8 percent in 2026. Exports growth, including pharmaceutical exports, is expected to slow, while the full reopening of the Tyra natural gas and oil field, which operated at reduced capacity last year following maintenance, will provide a temporary boost in 2025. The U.S. is a key trading partner. However, a significant portion of Danish exports to the U.S. consists of merchanting and processing, while exports of goods produced in Denmark passing through customs make up only 3 percent of total exports, limiting the direct impact of U.S. tariffs on the Danish economy. External risks dominate the outlook, including reversal of globalization, including higher trade barriers and deepening geoeconomic fragmentation.

Executive Board Assessment

Denmark’s growth is expected to remain relatively strong, but elevated global uncertainty clouds the outlook. Output growth is projected to gradually moderate to its potential, with slowing exports, including in pharmaceuticals, offset by a pickup in domestic demand. Medium-term growth is projected at around 1.5 percent, assuming a maturing pharmaceutical sector and a declining working-age population. Labor market pressures have eased, with inflation anticipated to stay around 2 percent. External risks dominate the outlook, including reversal of globalization, including higher trade barriers and deepening geoeconomic fragmentation. Denmark’s robust institutions, competitive and relatively diversified economic structure, strong fiscal position, and highly educated workforce all reinforce its resilience to external shocks. Staff assesses that Denmark’s external balance is stronger than the level implied by medium-term fundamentals and desirable policies.

Although Denmark’s fiscal position is strong, significantly higher and more persistent increases in defense spending would require adjustment measures to ensure long-term fiscal sustainability. These adjustment measures should be growth-friendly while ensuring fairness to preserve the welfare state. While both expenditure and revenue measures should be explored, given the already high tax burden, adjustments could come more from spending than revenue measures. Structural reform efforts will continue to be vital to enhance labor supply and income levels, thus generating revenues. The structural balance floor of -1 percent of GDP under current national fiscal rules should be respected.

Systemic risks are contained; however, the authorities should remain vigilant in monitoring financial sector risks. Banks are well-capitalized, with strong profitability, asset quality, and liquidity. To further strengthen financial system resilience, the authorities should thoroughly examine banks‘ modeling practices of International Financial Reporting Standards 9 to ensure robust credit risk provisioning, complete the review of internal ratings-based models, implement the EU’s CRR III/CRD VI as planned, enhance resilience against cyberattacks, and ensure adequately staffing the Financial Supervisory Authority. Given the considerable size and extensive interconnectedness of nonbank financial institutions (NBFIs) within the financial system, as well as their susceptibility to market vulnerabilities, the authorities should also continue strengthening the oversight framework for NBFIs. Given elevated geopolitical risks and evolving threats, the authorities should continue efforts to further strengthen the Anti-Money Laundering/Countering the Financing of Terrorism framework.

Capital-based macroprudential policy is broadly appropriate, but borrower-based measures should be tightened to address pockets of vulnerabilities. Given heightened global risks and a fragile commercial real estate sector, the 2.5 percent countercyclical capital buffer and the 7 percent sector-specific systemic risk buffer should remain in place. The authorities should consider lowering the maximum loan-to-value ratio below the current 95 percent and reduce incentives for larger mortgages by lowering the tax deductibility of mortgage interest expenses.

Structural reforms should further intensify to sustain high levels of income, preserve fiscal space, and sustain the welfare state. Geopolitical and trade tensions and an aging population could weigh on long-term potential growth. To address this challenge, the government should continue efforts to strengthen policies to support entrepreneurship, harness the benefits of digitalization and Artificial Intelligence (AI), and reduce regulatory burdens on businesses while balancing costs and benefits. Ensuring a sufficient labor supply with the right skills, such as IT, health, and long-term care professionals is also critical. Furthermore, deepening EU single market will enhance Denmark’s business dynamism and potential growth as this will enhance the benefits of economies of scale and network effects, thus expanding the market for Danish businesses. Denmark’s commitment to supporting multilateral and transparent trade policies is commendable.

Strengthening climate adaptation will support sustainable growth. Denmark is particularly vulnerable to sea level rise, storm surges, and coastal erosion, necessitating a well-designed long-term adaptation plan. The government is developing National Climate Adaptation Plan II, which focuses on enhanced coastal and groundwater protection, urban flood management, and the assessment of infrastructure needs, including financing responsibilities among central and local governments and the private sector. The authorities are also encouraged to reform the property insurance scheme (“Storm Surge Scheme”) to make insurance premiums risk-based.

[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.

[2] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.