IMF Executive Board Concludes 2025 Article IV Consultation with Denmark

IMF News, July 3, 2025

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• Published: July 3, 2025

Key messages and overview

• The Executive Board of the International Monetary Fund (IMF) completed the Article IV Consultation for Denmark and considered and endorsed the staff appraisal without a meeting on a lapse of time basis.
• Strong growth has continued, primarily driven by pharmaceutical exports; 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.
• 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.

Growth outlook and risks

• Output growth:
  • 2024: 3.7 percent
  • 2025: 3.0 percent (expected)
  • 2026: 1.8 percent (expected)
• Drivers and near-term factors:
  • Continued expansion of pharmaceutical exports has been a primary driver.
  • 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.
  • Exports growth, including pharmaceutical exports, is expected to slow as the exceptional pharmaceutical expansion begins to normalize.
• External risks:
  • Reversal of globalization, including higher trade barriers and deepening geoeconomic fragmentation, dominates the outlook.
  • The U.S. is a key trading partner; 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.
• Medium-term projection:
  • Growth is projected at around 1.5 percent, assuming a maturing pharmaceutical sector and a declining working-age population.

Executive Board assessment of macroeconomic position

• Denmark’s institutions, economic structure, fiscal position, and workforce reinforce resilience to external shocks.
• Staff assesses Denmark’s external balance is stronger than the level implied by medium-term fundamentals and desirable policies.
• Labor market pressures have eased; inflation anticipated to stay around 2 percent.
• Although fiscal position is strong, significantly higher and more persistent increases in defense spending would require adjustment measures to ensure long-term fiscal sustainability.
• The structural balance floor of -1 percent of GDP under current national fiscal rules should be respected.

Fiscal policy guidance

• Adjustment measures to address higher defense and aging-related expenditures should be growth-friendly and ensure fairness to preserve the welfare state.
• Explore both expenditure and revenue measures; given the already high tax burden, adjustments could come more from spending than revenue measures.
• Structural reform efforts should enhance labor supply and income levels to generate revenues.

Financial sector and macroprudential policy

• Systemic risks are contained; banks are well-capitalized, with strong profitability, asset quality, and liquidity.
• Recommendations to strengthen financial resilience:
  • 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.
  • Ensure adequate staffing of the Financial Supervisory Authority.
• Nonbank financial institutions (NBFIs):
  • Given their considerable size, extensive interconnectedness, and susceptibility to market vulnerabilities, continue strengthening the oversight framework for NBFIs.
• Anti-Money Laundering/Countering the Financing of Terrorism:
  • Continue efforts to further strengthen the framework given elevated geopolitical risks and evolving threats.

• Macroprudential stance:
  • Capital-based macroprudential policy is broadly appropriate.
  • Borrower-based measures should be tightened to address pockets of vulnerabilities.
  • Maintain the 2.5 percent countercyclical capital buffer.
  • Maintain the 7 percent sector-specific systemic risk buffer.
  • Consider lowering the maximum loan-to-value ratio below the current 95 percent.
  • Reduce incentives for larger mortgages by lowering the tax deductibility of mortgage interest expenses.

Structural reform priorities

• Intensify structural reforms to sustain high income levels, preserve fiscal space, and sustain the welfare state.
• Key reform areas:
  • Strengthen policies to support entrepreneurship.
  • Harness the benefits of digitalization and Artificial Intelligence (AI).
  • Reduce regulatory burdens on businesses while balancing costs and benefits.
  • Ensure sufficient labor supply with the right skills, such as IT, health, and long-term care professionals.
  • Deepen the EU single market to enhance business dynamism and potential growth.
• Denmark’s commitment to supporting multilateral and transparent trade policies is noted positively.

Climate adaptation and resilience

• Denmark is particularly vulnerable to sea level rise, storm surges, and coastal erosion, necessitating a well-designed long-term adaptation plan.
• National Climate Adaptation Plan II focuses on:
  • Enhanced coastal and groundwater protection.
  • Urban flood management.
  • 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.

Denmark: Selected Economic Indicators (selected entries)

• Output
  • Real GDP growth (%): 2024: 3.7; 2025 (Projections): 3.0; 2026 (Projections): 1.8
• Employment
  • Unemployment rate (%): 2024: 2.9
• Prices
  • Inflation (%, average): 2024: 1.3; 2025 (Projections): 2.0; 2026 (Projections): 1.9
• General Government Finances
  • Revenue (% GDP): 2024: 51.0; 2025 (Projections): 50.0; 2026 (Projections): 50.4
  • Expenditures (% GDP): 2024: 46.5; 2025 (Projections): 48.4; 2026 (Projections): 48.9
  • Fiscal balance (% GDP): 2024: 4.5; 2025 (Projections): 1.6; 2026 (Projections): 1.5
  • Structural balance (% potential GDP): 2024: 0.7; 2025 (Projections): 0.3
  • Public debt (% GDP): 2024: 31.1; 2025 (Projections): 29.3; 2026 (Projections): 28.0
• Money and Credit
  • Domestic credit growth (%): 2024: 2.7; 2025 (Projections): 4.3; 2026 (Projections): 3.3
  • 3-month interbank interest rate (%): 2024: 3.5; 2025 (Projections): 2.5; 2026 (Projections): 2.3
  • 10-year government bond yield (%): 2024: 2.6
• Balance of Payments
  • Current account (% GDP): 2024: 12.1; 2025 (Projections): 11.4; 2026 (Projections): 11.2
  • International reserves (% change): 2024: 0.4
• Exchange Rate
  • ULC-based REER (% change): 2024: -2.1

Source: Press Release No. 25/236, IMF Communications Department, July 3, 2025.

References

• Denmark and the IMF
• IMF Policy Advice -- A Factsheet
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home