{ "title": "Denmark: Staff Concluding Statement of the 2021 Article IV Mission", "publication": "IMF News, May 11, 2021", "sourceUrl": "https://www.imf.org/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission", "overlayPath": "/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission/index.md", "summary": "Denmark entered the pandemic on a strong economic footing and used large policy space to navigate the crisis.", "publishDate": "2021-05-11", "sections": [ { "heading": "Mission summary and key messages", "content": "- Denmark entered the pandemic on a strong economic footing and used large policy space to navigate the crisis.\n- The decline in real GDP in 2020 was mainly driven by weak private consumption and net exports; Denmark experienced one of the smallest contractions in Europe.\n- Swift and sizable fiscal response cushioned the impact on activity; fiscal policy continues to support the recovery and public debt is sustainable.\n- Unprecedented policy measures supported the labor market; unemployment increased only slightly.\n- The current account surplus declined, mainly due to deteriorating services’ exports.\n- Macrofinancial vulnerabilities stem largely from accelerating housing price growth amid high and increasing household leverage.\n- Policy priorities: support the recovery, facilitate green and digital transitions, safeguard vulnerable groups, and enhance macrofinancial resilience." }, { "heading": "Key policy recommendations", "content": "- Fiscal Policy\n - Keep the fiscal framework flexible given the uncertain outlook and provide a bridge to the economy of the future.\n - If the recovery falters, deploy substantive fiscal space as needed.\n - Once the recovery is fully entrenched, implement a plan to return to the medium-term objective.\n- Labor market\n - Shift from exceptional support to strengthening “flexicurity” measures to facilitate efficient resource reallocation as recovery gains momentum.\n - Continue efforts to improve employment prospects for the young, the low-skilled, and the foreign-born.\n- Macrofinancial\n - Targeted policies to address vulnerabilities from high household leverage amid rapid housing price increases while supporting credit extension.\n - Tighten macroprudential tools in coordination with balancing tax incentives, and improve housing supply.\n - Continue efforts to strengthen AML/CFT supervision.\n- Green transformation\n - Adopt a strategy including enhanced carbon pricing, reinforced by fiscal incentives across sectors to attain ambitious emissions goals.\n - Implement incentives for green investment (Green Tax Reform Phase 1) and planned increase in public investment.\n - Create further incentives for the private sector to step up green investment given sizable climate-related investment needs." }, { "heading": "Outlook and risks", "content": "- Baseline near-term outlook: rebound in activity predicated on increased vaccine availability by the second half of the year.\n- Output growth projected to rebound to 2.6 and 3.3 percent in 2021 and 2022 respectively.\n- Recovery drivers: rebound of private consumption and net exports; investment momentum should strengthen in 2022 due to initiatives incentivizing green investment and digitalization.\n- Labor market will continue to improve, supporting wages; negative output gap estimated to close by 2022.\n- Potential growth to pick up in the medium term thanks to initiatives to raise investment and labor supply, helping limit scarring from the pandemic.\n- Risks (tilted to the downside)\n - Further waves of infections, new virus variants, or slower-than-expected vaccination rollout could impede recovery.\n - Upside if pandemic is contained faster with quicker vaccination rollout.\n - Disorderly reallocation toward a different post-pandemic economic landscape poses downside risk near-to-medium term.\n - Macrofinancial vulnerabilities: rapid house price growth amid high and increasing household leverage; a domestic or regional house price correction could trigger adverse feedback loops and weigh on consumption growth." }, { "heading": "Macroeconomic policies", "content": "- Fiscal policy\n - Continue supporting the recovery while facilitating economic transformation.\n - Fiscal deficit in the near term expected to deteriorate due to continued COVID crisis support and measures facilitating green and digital transformations.\n - Medium-term fiscal stance envisaged to remain broadly neutral to protect buffers in view of significant future health care costs and adverse demographics.\n - Maintain flexibility: allow strong automatic stabilizers to operate fully and deploy fiscal space if recovery falters; plan to return to medium-term objective once recovery is entrenched.\n- Monetary policy\n - Objective should remain to preserve the fixed exchange rate peg, which serves Denmark well and provides a framework for low and stable inflation.\n - Central bank should be ready to deploy its toolkit to defend the peg in the event of undue pressure." }, { "heading": "Financial sector policies", "content": "- Banking system\n - Remains profitable, liquid, and highly capitalized but faces a challenging low interest rate environment.\n - Banks’ setting of interest rates on deposits and loans remains a commercial decision; this preserves market efficiency.\n - Large pre-pandemic buffers and low exposures to hardest-hit sectors limited initial credit risk; pandemic support measures mitigated liquidity and credit risks.\n - Full release of the countercyclical capital buffer (CCyB) provided additional lending and loss-absorbing capacity.\n - Impairments likely to increase once support schemes expire.\n - Loose financial conditions and rapid residential real estate price growth provide ground for risk build-up; system is highly interconnected domestically and regionally.\n- Prudential recommendations\n - Deploy prudential tools to maintain financial stability; unless risk build-up subsides markedly or a new negative shock occurs, the CCyB should be increased with an appropriate phase-in period.\n - Enhance monitoring of credit cycles across sectors.\n - Consider differentiated risk weights at the sectoral level if credit is fueling overheating-prone sectors.\n - Maintain guidance on dividend payouts and share buybacks as needed, consistent with ESRB and EBA guidelines.\n - Use the newly implemented credit registry to develop a fully risk-based prudential framework to timely monitor risk dynamics.\n - Continue advances to AML/CFT framework (recently led to a third consecutive upgrade by the Financial Action Task Force).\n- Household leverage and housing market\n - Tighten macroprudential tools and deploy coordinated tax and housing supply policies to address high and increasing household leverage amid rapid house price growth.\n - Specific measures recommended:\n - Tighten debt-to-income ratio (DTI) caps for all loans irrespective of loan-to-value ratios; allow DTI caps to be differentiated based on borrowers’ riskiness.\n - Mandatory amortization for highly leveraged households, regardless of maturity and rate-type.\n - Tighter limits on income-based measures for interest-only and floating-rate mortgages or increase minimum down-payment requirements.\n - Reduce mortgage interest deductibility consistent with the overall tax framework.\n - Relax supply constraints via streamlined zoning and planning procedures and reduced rent control." }, { "heading": "Labor market policies", "content": "- Flexicurity model\n - Flexicurity provides a powerful framework to implement and target labor market policy; was enhanced during the crisis via wage compensation and workshare schemes.\n - Crisis measures helped cushion labor market impact, though unemployment among youth, the low-skilled, and the foreign-born increased disproportionately.\n- Support and reform measures\n - Authorities expanded incentives for vocational education of in-demand skills (VET), increased funding for upgrading skills, and extended training to include health courses and green economy jobs.\n - Basic integration education (IGU) program expanded in 2020 to promote refugees’ labor market participation; a new migrant full-time activation scheme has been announced.\n - As recovery takes hold, shift focus from exceptional support to facilitating matching and reallocation through upskilling and education; phase out exceptional support measures to protect flexibility.\n - Policies to increase labor supply should continue: ongoing pension reform linking retirement age to life-expectancy is welcomed.\n - Consider comprehensive tax reform using targeted in-work benefits, improve after-hours public childcare provision, and simplify certification of foreign degrees to attract skilled foreign labor." }, { "heading": "Reforms to boost investment and productivity", "content": "- Green transition and investment\n - Green Tax Reform Phase 1 is envisaged to have a small impact on emissions.\n - Staff analysis: a strategy including enhanced carbon pricing, reinforced by fiscal incentives across sectors, would help Denmark attain its ambitious emissions goal.\n - Prompt definition of the tax framework for green investment, including the level and base of carbon taxation, would reduce uncertainty and incentivize private green investment.\n - Climate adaptation presents a significant opportunity to increase investment; planned increase in public investment is welcome but more is needed.\n- Digitalization and ICT investment\n - Denmark ranks high on digitalization but scope remains to enhance ICT investment.\n - Support expansion of knowledge-intensive, typically ICT-intensive, sectors via rebalancing taxation for start-ups and high-technology firms:\n - Relax cap of carry-forward losses and reduce taxation of dividends to improve investment conditions.\n - Ensure provision of technical and digital skills to supply adequate human capital.\n- Access to finance and corporate taxation\n - Better access to equity finance would improve funding for new, small, or high-technology firms that may face credit constraints due to lack of collateral.\n - Continue implementing investment vehicles for pension sector and public resources to invest in SMEs.\n - Assess proper implementation of an incremental Allowance for Corporate Equity (ACE) to reduce debt bias and lower the cost of capital.\n - By raising investment and productivity, and bolstering labor supply, these measures would boost potential growth and limit pandemic-induced scarring.\n\nStaff thank the authorities and counterparts for accommodative flexibility, hospitality, and candid, high-quality discussions.\n\n---\n\n\n References\n\n- Denmark and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission/bundle-manifest.json)", "Published: May 11, 2021", "Denmark entered the pandemic on a strong economic footing and used large policy space to navigate the crisis.", "The decline in real GDP in 2020 was mainly driven by weak private consumption and net exports; Denmark experienced one of the smallest contractions in Europe.", "Swift and sizable fiscal response 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 deteriorating services’ exports.", "Macrofinancial vulnerabilities stem largely from accelerating housing price growth amid high and increasing household leverage.", "Policy priorities: support the recovery, facilitate green and digital transitions, safeguard vulnerable groups, and enhance macrofinancial resilience.", "Fiscal Policy", "Labor market", "Macrofinancial", "Green transformation", "Baseline near-term outlook: rebound in activity predicated on increased vaccine availability by the second half of the year.", "Output growth projected to rebound to 2.6 and 3.3 percent in 2021 and 2022 respectively.", "Recovery drivers: rebound of private consumption and net exports; investment momentum should strengthen in 2022 due to initiatives incentivizing green investment and digitalization.", "Labor market will continue to improve, supporting wages; negative output gap estimated to close by 2022.", "Potential growth to pick up in the medium term thanks to initiatives to raise investment and labor supply, helping limit scarring from the pandemic.", "Risks (tilted to the downside)", "Fiscal policy", "Monetary policy", "Banking system", "Prudential recommendations", "Household leverage and housing market", "Flexicurity model", "Support and reform measures", "Green transition and investment", "Digitalization and ICT investment", "Access to finance and corporate taxation", "[Denmark and the IMF](http://www.imf.org/external/country/DNK/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission/index.md", "json": "/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2021/05/11/mcs051121-denmark-staff-concluding-statement-of-the-2021-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-26T00:22:23.128Z" }