IMF Executive Board Concludes 2016 Article IV Consultation with Denmark
IMF News, July 5, 2016
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- Published: July 5, 2016
Economic performance and outlook
- Extended period of relatively weak growth, notably on account of low productivity growth that has lagged peers.
- Trend decline in oil and gas production has started to weigh on output.
- Denmark was hard hit by the 2008/09 global crisis, coinciding with the puncture of a local housing bubble; initial recovery interrupted by renewed weakness in 2012–13; moderate recovery resumed from 2014.
- Short-term drivers and forecasts (narrative):
- Private consumption expected to continue as main driver for growth in the short term, supported by low interest rates and oil prices.
- Investment projected to pick up as firm deleveraging diminishes and the housing market recovers.
- Export growth likely to remain low, in line with the weak external environment.
- “The economy is forecast to grow by 1.3 percent in 2016 and 1.6 percent in 2017.”
- “Inflation is expected to remain subdued in 2016, reflecting lower oil prices, but then rise steadily, reaching 2 percent in the outer years reflecting a tightening labor market and a closing output gap.”
- Table-based supply and demand indicators (selected, by year):
- Real GDP: 2013: -0.2; 2014: 1.3; 2015: 1.2; 2016: 1.6; 2017: 1.8; 2018: 1.9.
- Final domestic demand: 2013: 0.0; 2014: 1.0; 2015: 1.5; 2016: 2.0.
- Private consumption: 2013: -0.1; 2014: 0.5; 2015: 2.1; 2016: 2.4; 2017: 2.5.
- Gross fixed investment: 2013: 1.1; 2014: 3.4; 2015: 0.8; 2016: 3.0; 2017: 2.8.
- Gross national saving (percent of GDP): 2013: 26.6; 2014: 27.6; 2015: 26.3; 2016: 26.0; 2017: 26.1.
- Gross domestic investment (percent of GDP): 2013: 18.9; 2014: 19.1; 2015: 19.0; 2016: 19.3; 2017: 19.4; 2018: 19.6; 2019: 19.7.
- Output gap (percent of potential output): 2013: -1.7; 2014: -1.2; 2015: -1.0; 2016: -0.5; 2017: -0.3.
- Harmonized unemployment rate (percent): 2013: 7.0; 2014: 6.5; 2015: 6.2; 2016: 6.0; 2017: 5.8; 2018: 5.7.
- Public finance (percent of GDP), selected lines:
- Total revenues: 2013: 55.5; 2014: 57.4; 2015: 53.6; 2016: 51.1; 2017: 50.0; 2018: 49.7; 2019: 49.5; 2020: 49.4.
- Total expenditures: 2013: 56.5; 2014: 56.0; 2015: 55.7; 2016: 53.5; 2017: 51.9; 2018: 51.4; 2019: 51.0; 2020: 50.6; 2021: 50.4.
- Overall balance: 2013: -1.1; 2014: -2.1; 2015: -2.3; 2016: -1.9; 2017: -1.5.
- Primary balance: 2013: -0.9; 2014: -1.4; 2015: -1.6; 2016: -1.3; 2017: -0.8.
- Gross debt: 2013: 44.6; 2014: 45.8; 2015: 47.2; 2016: 47.5; 2017: 47.1; 2018: 46.3; 2019: 45.5.
- External accounts (percent of GDP), selected lines:
- Exports of goods & services: 2013: 53.9; 2014: 53.4; 2015: 52.4; 2016: 54.2; 2017: 57.1; 2018: 58.3; 2019: 59.5.
- Imports of goods & services: 2013: 47.8; 2014: 47.3; 2015: 46.8; 2016: 48.8; 2017: 53.2; 2018: 54.6.
- Trade balance, goods and services: 2013: 6.1; 2014: 6.3; 2015: 5.6; 2016: 5.5; 2017: 5.3; 2018: 5.2; 2019: 5.1; 2020: 4.9.
- Current account: 2013: 7.1; 2014: 7.7; 2015: 6.9; 2016: 6.4.
- Selected price and rate indicators:
- M3 growth (end of year): 2014: 12.6; 2015: 11.9.
- Short-term interbank interest rate (3 month): 2014: 0.3.
- Average DKK per US$ rate: 2013: 6.7.
- Social indicators (reference year):
- GDP per capita, USD (2013): $59,129.
- At-risk-of-poverty rate (2012): 19.0 percent.
Risks and vulnerabilities
- Downside risks dominate:
- A sharper than expected slowdown in Europe or in emerging markets could derail the recovery given Denmark’s deep integration in the world economy.
- Exceptionally high household debt and a high share of adjustable rate mortgages raise vulnerability: volatility in global financial conditions leading to a spike in market interest rates could abruptly raise households’ debt service and depress consumption.
- Disruption of trade and financial flows from a “Brexit” compounds external risks.
- Domestically, rapid house price increases, if unchecked, would heighten the risk of a correction over the medium term.
Executive Board assessment and policy recommendations
- General guidance:
- Directors encouraged the authorities to build on a strong track record of sound policies to help sustain the economic recovery, reduce financial sector vulnerabilities, and raise growth prospects.
- Fiscal policy:
- Considering Denmark’s moderate public debt level and the absence of an independent monetary policy, Directors broadly supported plans for a gradual fiscal consolidation while allowing flexibility for fiscal policy to act as the main stabilizer of cyclical fluctuations.
- If downside risks materialize, automatic stabilizers should be allowed to operate and short-term fiscal support would be warranted.
- Conversely, a faster fiscal tightening may be needed if the recovery gathers pace faster than expected.
- Monetary policy:
- Directors agreed that monetary policy should continue to focus on maintaining the exchange rate peg.
- Financial sector and macroprudential policy:
- Rapid price increases in segments of the housing market together with high household indebtedness could pose macroeconomic and financial stability risks.
- Directors welcomed recent measures expected to restrain mortgage lending and the strengthened risk management guidance for lenders, but believed more should be done to mitigate medium-term risks.
- Recommended actions included:
- Strengthen the macroprudential toolbox.
- Consider introducing debt-to-income limits.
- Reduce the tax deductibility of mortgage interest payments.
- End the procyclical valuation freezes for land and property taxes.
- Encourage efforts to alleviate supply constraints and ease tight rental market regulations.
- Financial supervision and regional cooperation:
- Commended good follow up on the 2014 FSAP advice and encouraged implementation of remaining recommendations.
- Suggested measures to strengthen the operational independence of the financial supervisor (DFSA).
- Welcomed efforts to enhance regional cooperation on financial stability issues given Nordic banking interconnectedness, and underscored the importance of reaching strong agreements on information sharing, cross-border supervision, depositor protection, and resolution arrangements.
- Structural and growth policies:
- Welcomed the government’s growth package, including plans to devise a new strategy for selected network sectors and to liberalize the Planning Act.
- Encouraged reforms to strengthen competition and increase firm productivity, including by reducing product market regulation particularly in retail trade and some network sectors.
- Migration and integration:
- Welcomed the new tripartite agreement on integration of migrants, but stressed that implementation will need to be closely monitored.
- Urged the authorities to consider lifting restrictions on accepting regular work while asylum requests are being processed and starting integration programs earlier for asylum seekers whose requests have a high probability of success.
Excerpted from Press Release No. 16/305, IMF Communications Department, July 5, 2016.
Content in this bundle
- Country Report (PDF)
- Table: Denmark: Selected Economic and Social Indicators, 2013–21