IMF Executive Board Concludes 2012 Article IV Consultation with Denmark

Public Information Notice (PIN) No. 13/08
January 24, 2013

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2012 Article IV Consultation with Denmark is also available.

On January 16, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Denmark.1

Background

Denmark’s near-term economic outlook is expected to improve as the economy is on the road to recovery from the global financial crisis. Output is projected to have declined by 0.4 percent in 2012, but modest growth is expected to resume in 2013, lifted mostly by private consumption and moderate business investment growth.

A combination of discretionary fiscal measures and freely-operating generous automatic stabilizers supported weaker than expected economic growth during 2010–12. The monetary policy response to safe-haven inflows has helped to reduce the need for foreign exchange purchases to maintain the peg to the euro. In the financial sector, prudential regulation has been strengthened through implementation of the ‘supervisory diamond’ initiative as well as through the reduction of banks’ dependency on state guarantees.

Risks are weighted to the downside given the close trade and financial links to the euro area, worsening global financial conditions as well as domestic vulnerabilities stemming from house price developments and adverse developments in the domestic financial sector. Fiscal consolidation efforts may weigh on future growth unless the deleveraging process that is ongoing in the private sector does not reverse on the back of resuming confidence.

Executive Board Assessment

Executive Directors noted that Denmark’s recovery from the global financial crisis is faltering, notwithstanding the authorities’ strong policy response, which has included a mix of expansionary fiscal policy and labor market reforms. While growth is expected to resume in 2013, downside risks persist, stemming mainly from a further slowdown in major trade partners or a worsening of the outlook for financial and real estate markets. Directors agreed that Denmark is well positioned to address its macroeconomic policy challenges, with its low public debt, net creditor status, and strong credit rating.

Directors supported Denmark’s medium-term fiscal consolidation plans. They welcomed recent fiscal measures and the reforms addressing overruns in local spending, including a reinforcement of sanctions. They broadly agreed that, if growth falls significantly below current projections, the authorities should allow automatic stabilizers to operate fully and consider additional support to the economy within the space permitted by EU commitments. In this context, a number of Directors underscored the importance of meeting the 2013 targets under the EU Excessive Deficit Procedure and exiting from it in early 2014 for maintaining market confidence.

Directors agreed that the longstanding peg to the euro has served Denmark well and remains appropriate. They noted, however, that the recent shift to negative policy rates—to contain capital inflows and support the peg—poses challenges for monetary policy and carries risks if maintained for a prolonged period. They encouraged careful monitoring of these issues.

Directors welcomed the authorities’ initiatives on macro-prudential and crisis resolution policies, including the creation of the interagency Systemic Risk Council. Banks’ dependency on state guarantees has been reduced, and prudential regulation has been strengthened. However, continued vigilance is warranted and there is scope for additional strengthening of the financial sector through more robust capital and liquidity buffers, risk-based deposit insurance premia, limits on deferred amortization mortgage loans, and a reversal of the decoupling of taxes from real estate values to limit excess volatility in housing markets. Directors welcomed the authorities’ engagement in the development of a European banking union.

Directors commended the authorities’ actions to address the challenges of improving competitiveness and productivity growth. Additional reforms to raise potential growth would include further measures to boost competition and limit tax disincentives to work and to the accumulation of human capital. In this context, Directors looked forward to the findings of the Productivity Commission on productivity enhancements, including in the public sector.


Denmark: Selected Economic and Social Indicators, 2006–17
 
  2009 2010 2011 2012 2013 2014 2015 2016 2017
  proj. proj. proj. proj. proj. proj.
 

Supply and Demand (change in percent)

                 

Real GDP

-5.7 1.6 1.1 -0.4 0.9 1.3 1.5 1.5 1.5

Net Exports 1/

1.2 0.0 0.7 -1.0 -0.1 0.1 0.1 0.1 0.1

Domestic demand

-4.7 0.6 -0.2 0.9 1.3 1.6 1.7 1.7 1.7

Private Consumption

-3.6 1.7 -0.5 1.0 1.4 1.6 2.0 2.0 2.0

Gross fixed investment

-15.9 -2.4 2.8 2.1 2.0 2.0 2.2 2.3 2.3

Gross national saving (percent of GDP)

20.3 22.7 23.2 22.5 22.0 21.6 21.4 21.3 21.1

Gross domestic investment (percent of GDP)

18.2 17.0 17.4 17.8 17.9 18.0 18.0 18.1 18.2

Potential output

0.4 0.3 0.4 0.4 0.5 0.6 1.1 1.1 1.3

Output gap (in percent of potential output)

-3.2 -2.0 -1.3 -2.1 -1.8 -1.1 -0.8 -0.4 -0.2

Labor Market (change in percent)

                 

Labor force

-2.2 0.4 0.5 0.3 0.3 0.3 0.3 0.3 0.3

Employment

-4.9 -1.1 0.4 0.3 0.4 0.8 0.6 0.5 0.5

Harmonized Unemployment rate (in percent) 2/

6.1 7.5 7.6 7.6 7.6 7.2 7.0 6.8 6.6

Prices and Costs (change in percent)

                 

GDP deflator

0.7 4.1 0.6 2.0 1.9 1.8 1.8 1.8 1.9

CPI (year average)

1.3 2.3 2.8 2.6 2.0 2.0 2.0 2.0 2.0

Public finance (percent of GDP)

                 

Central government balance

-2.0 -2.5 -2.0 -4.3 -2.5 -2.3 -1.7 -1.4 -0.3

General government revenues

55.2 54.8 55.5 54.3 54.6 52.9 53.2 52.7 53.7

General government expenditure

58.0 57.5 57.4 58.5 57.1 55.1 54.9 54.0 53.9

General government balance

-2.8 -2.7 -2.0 -4.2 -2.5 -2.2 -1.7 -1.4 -0.3

General government structural balance (percent of potential GDP)

-0.4 -1.4 -0.7 -1.0 0.0 -0.6 -0.6 -0.5 -0.1

General government primary balance 3/

-2.1 -2.0 -1.2 -3.4 -1.9 -1.7 -0.9 -0.6 0.4

General government gross debt

40.7 42.7 46.4 49.9 51.2 52.2 52.6 52.4 51.5

Money and Interest rates (percent)

                 

Domestic credit growth (end of year)

-1.8 1.6 -1.4

M3 growth (end of year)

4.5 7.9 -5.9

Short-term interest rate (3 month)

1.8 0.7 1.1

Government bond yield (10 year)

3.6 2.9 2.7

Balance of payments (in percent of GDP)

                 

Exports of goods & services

49.7 46.9 48.4 49.3 49.7 50.1 50.4 50.4 50.4

Imports of goods & services

-45.8 -43.6 -45.3 -46.5 -46.8 -47.1 -47.5 -47.5 -47.5

Trade balance, goods and services

3.8 3.3 3.1 2.8 2.9 2.9 2.9 2.9 2.9

Current account

3.4 5.9 5.6 5.2 5.0 5.0 5.2 5.3 5.5

Exchange rate

                 

Average DKK per US$ rate

5.4 5.6 5.4

Nominal effective rate (2000=100, ULC based)

105.9 102.0 101.2

Real effective rate (2000=100, ULC based)

102.0 96.4 96.6
 

Social indicators (Reference year)

GDP per capita, PPP (current international $) (2011): $41,015; At-risk-of-poverty rate (2010): 18.3 percent.

1/ Contribution to GDP growth.

2/ Eurostat definition.

3/ Overall balance net of interest.


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. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.



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