IMF Executive Board Concludes 2019 Article IV Consultation with Denmark
June 25, 2019
On June 21, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Denmark.
Denmark’s economic performance, based on a model that prizes social inclusiveness, continues to impress with high living standards and employment rates, along with low levels of income inequality. Growth remained solid in 2018, supported by domestic demand, with the economy operating above potential for an estimated third year in a row. The labor market is strong, with pressures gradually building. Overall wage growth has picked up, broadly in line with productivity. Inflation remains moderate. The fiscal position is neutral and public debt is sustainable. The current account surplus has declined, amid higher investment and lower savings. House prices have started to soften, but household debt remains high.
The outlook is for continued solid growth and gradually rising inflation and wages. Output is projected to grow above trend in the near-term, reaching 1.7 and 1.9 percent in 2019 and 2020 respectively. Private consumption and investment are expected to be the key drivers of growth, as financial conditions will stay accommodative and the fiscal stance will remain broadly neutral for some time. Inflation and wages are expected to gradually rise. Potential output growth is projected to increase from 1.4 percent in 2016 to around 1.8 percent over the medium term, a result of structural reforms and higher investment. But risks around the outlook are tilted to the downside. A sharper than expected slowdown in Denmark’s main trading partners could slow export growth, as could a disorderly Brexit. High household debt amid elevated house valuations remains a key source of macro-financial vulnerability. The ongoing money laundering case could further affect confidence in the financial sector and financial stability.
Executive Board Assessment [2]
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for sound economic and social policies that have delivered robust economic performance and high levels of social inclusion. They note that while the outlook is for continued growth, risks are tilted to the downside. In this context, they stressed the importance of policies to raise potential growth and enhance macro-financial resilience.
Given the substantial fiscal space in the medium term, Directors agreed that the fiscal stance should remain neutral, while letting automatic stabilizers operate fully in case of shocks to aggregate demand. Additional temporary loosening could also be considered in the event of a severe downturn, while remaining anchored to the medium-term objective. Directors encouraged the authorities to pursue further efficiency-improving reforms covering both revenues and expenditures, noting this could be implemented in a fiscally-neutral way or designed to provide stimulus if loosening is warranted.
Directors agreed that the fixed exchange rate policy has served Denmark well. They stressed that monetary policy should remain focused on maintaining the exchange rate peg.
Directors welcomed the overall soundness of the banking sector but noted that there are pockets of vulnerabilities. To strengthen financial resilience, Directors recommended a combination of micro- and macroprudential tools to increase buffers, in addition to the counter cyclical capital buffer, if risks continue to build up.
Directors commended the authorities for their recent efforts to strengthen cross-border AML/CFT supervision. They encouraged the authorities to continue to build on these efforts by adopting a comprehensive institutional risk assessment model, increasing the depth of AML/CFT inspections, and further expanding supervisors’ sanctioning powers. They also saw scope to strengthen regional and international cooperation.
Directors considered that high household leverage amid elevated house valuations requires coordinated policy action. To reduce vulnerabilities, they suggested enhancing the macroprudential toolbox, including by increasing focus on income-based macroprudential instruments. They encouraged the authorities to further reduce mortgage interest deductibility and consider new policies to promote housing supply.
Directors commended the strong labor market. They noted that increasing benefits to low-income workers would help alleviate inactivity traps, while reducing marginal tax rates for average income earners could increase hours worked. Directors also saw merit in further measures to incentivize the upgrading of technical and digital skills, close gender gaps, integrate migrants, and attract skilled foreign labor.
Directors noted that productivity growth remains weak. They encouraged the authorities to support broad-based innovation, improve the institutional framework for competition, and foster the environment for high-productivity sectors to expand. They also noted that addressing the debt bias and improving access to equity finance for SMEs would promote investment and help reduce the current account surplus.
|
|
2016 |
2017 |
2018 |
2019 |
2020 |
2021 |
||
|
Supply and Demand (change in percent) |
||||||||
|
Real GDP |
2.4 |
2.3 |
1.4 |
1.7 |
1.9 |
1.7 |
||
|
Final domestic demand |
2.7 |
2.3 |
2.5 |
2.1 |
2.0 |
1.9 |
||
|
Private consumption |
2.1 |
2.1 |
2.3 |
2.5 |
2.4 |
2.3 |
||
|
Public consumption |
0.2 |
0.7 |
0.8 |
0.3 |
0.2 |
0.2 |
||
|
Gross fixed investment |
7.6 |
4.6 |
5.1 |
3.4 |
3.0 |
2.8 |
||
|
Net exports 1/ |
0.1 |
0.2 |
-1.1 |
-0.1 |
0.1 |
0.0 |
||
|
Gross national saving (percent of GDP) |
29.4 |
29.6 |
28.5 |
28.7 |
28.6 |
28.5 |
||
|
Gross domestic investment (percent of GDP) |
21.4 |
21.6 |
22.7 |
23.0 |
23.2 |
23.4 |
||
|
Potential output |
1.4 |
1.6 |
1.7 |
1.7 |
1.7 |
1.7 |
||
|
Output gap (percent of potential output) |
0.5 |
1.1 |
0.9 |
0.8 |
1.0 |
1.0 |
||
|
Labor Market (change in percent) 2/ |
||||||||
|
Labor force |
3.2 |
-1.0 |
0.9 |
0.6 |
0.7 |
0.8 |
||
|
Employment |
3.2 |
-0.5 |
1.7 |
0.6 |
0.7 |
0.7 |
||
|
Harmonized unemployment rate (percent) |
6.2 |
5.7 |
5.0 |
5.0 |
5.0 |
5.0 |
||
|
Prices and Costs (change in percent) |
||||||||
|
GDP deflator |
0.7 |
1.4 |
0.4 |
1.7 |
1.7 |
2.1 |
||
|
CPI (year average) |
0.0 |
1.1 |
0.7 |
1.3 |
1.5 |
1.8 |
||
|
Public Finances (percent of GDP) |
||||||||
|
Total revenues |
52.6 |
52.6 |
51.9 |
51.7 |
51.2 |
51.0 |
||
|
Total expenditures |
52.7 |
51.2 |
51.4 |
51.6 |
51.2 |
51.2 |
||
|
Overall balance |
-0.1 |
1.4 |
0.5 |
0.2 |
0.0 |
-0.1 |
||
|
Primary balance |
0.4 |
1.6 |
0.4 |
0.0 |
-0.4 |
-0.4 |
||
|
Cyclically-adjusted balance (percent of potential GDP) |
-0.4 |
0.6 |
-0.1 |
-0.5 |
-0.8 |
-0.9 |
||
|
Structural balance (percent of potential GDP) |
-0.2 |
0.2 |
0.1 |
0.0 |
0.0 |
0.0 |
||
|
Gross debt |
37.2 |
35.5 |
34.3 |
33.0 |
31.9 |
33.9 |
||
|
Money and Interest Rates (percent) |
||||||||
|
Domestic credit growth (end of year) |
1.6 |
1.5 |
3.5 |
… |
… |
… |
||
|
M3 growth (end of year) |
-3.9 |
3.0 |
-2.9 |
… |
… |
… |
||
|
Short-term interbank interest rate (3 month) |
-0.1 |
-0.3 |
-0.3 |
… |
… |
… |
||
|
Government bond yield (10 year) |
0.3 |
0.5 |
0.4 |
… |
… |
… |
||
|
Balance of Payments (percent of GDP) |
||||||||
|
Exports of goods & services |
53.6 |
54.5 |
54.7 |
54.6 |
54.5 |
54.2 |
||
|
Imports of goods & services |
46.9 |
47.4 |
49.6 |
49.9 |
50.1 |
49.9 |
||
|
Trade balance, goods and services |
6.7 |
7.1 |
5.0 |
4.6 |
4.4 |
4.3 |
||
|
Oil trade balance |
-0.2 |
-0.2 |
-0.4 |
-0.5 |
-0.7 |
-0.7 |
||
|
Current account |
7.9 |
8.0 |
5.8 |
5.6 |
5.3 |
5.1 |
||
|
International reserves, changes |
0.4 |
0.8 |
-0.3 |
… |
… |
… |
||
|
Exchange Rate |
||||||||
|
Average DKK per US$ rate |
6.7 |
6.6 |
6.3 |
… |
… |
… |
||
|
Nominal effective rate (2010=100, ULC based) |
97.6 |
98.7 |
100.2 |
… |
… |
… |
||
|
Real effective rate (2010=100, ULC based) |
94.9 |
97.1 |
99.4 |
… |
… |
… |
||
|
Memorandum Items |
||||||||
|
Nominal GDP (Bln DKK) |
2100 |
2178 |
2218 |
2294 |
2377 |
2468 |
||
|
GDP (Bln USD) |
312 |
330 |
351 |
… |
… |
… |
||
|
GDP per capita (USD) |
54,665 |
57,380 |
60,766 |
… |
… |
… |
||
|
Sources: Statistics Denmark, Danmarks Nationalbank, Eurostat, IMF World Economic Outlook, and Fund staff calculations. 1/ Contribution to GDP growth. 2/ Based on Eurostat definition. 3/ General government. 4/ Overall balance net of interest. 5/ Cyclically-adjusted balance net of temporary fluctuations in some revenues (e.g., North Sea revenue, pension yield tax revenue) and one-offs. |
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[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] 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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