IMF Executive Board Concludes 2022 Article IV Consultation with Denmark
IMF News, June 15, 2022
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- Published: June 15, 2022
Economic recovery and near-term outlook
- Denmark’s economic activity has rebounded above pre-pandemic levels, led by strong domestic demand.
- Private consumption normalized amid easing of containment measures; investment remained solid; public consumption continued to support activity.
- Near-term growth is projected at 3.2 percent in 2022 and 1.5 percent in 2023.
- Lower demand from main trading partners—notably Germany—will weigh on Danish exports.
- Public consumption is expected to retreat as the unwinding of COVID-support measures more than offsets war-related spending.
Inflation, energy prices, and risks to the outlook
- Inflation was propelled to a historic high by soaring energy prices and labor market pressures.
- Headline inflation is projected to rise appreciably in 2022—close to 5 percent—mainly due to surging energy prices.
- Balance of risks is tilted to the downside:
- Key downside risks: further escalation of the war in Ukraine; pandemic-related risks including new variants; high and increasing household debt with elevated housing valuations.
- Key upside risk: further labor market pressures related to a faster-than-expected rebound.
Executive Board assessment and policy stance
- Directors welcomed the authorities’ swift and well-calibrated pandemic response that facilitated a strong recovery.
- Directors encouraged retaining policy flexibility while preserving macro-financial stability and supporting sustainable, inclusive growth.
- Given cyclical pressures, Directors agreed with the planned fiscal tightening in 2022 but underscored the importance of retaining flexibility and recalibrating policies as needed.
- Directors commended the authorities’ energy compensation scheme as small, temporary, and targeted; any additional measures should also be targeted and fiscally neutral.
- Directors agreed the exchange rate peg has served Denmark well and that monetary policy should stand ready to maintain it.
Fiscal and public finance outlook (selected messages)
- Planned fiscal tightening in 2022 is appropriate given cyclical pressures; flexibility should be preserved to respond to risks.
- Key public finance figures (percent of GDP, as presented):
- Gross national saving: 30.8 (2019), 31.1 (2020), 31.6 (2021), 31.4 (2022), 31.2 (2023), 31.0? (note: only values through 2023 explicitly listed in table).
- Gross domestic investment: 22.0 (2019), 22.9 (2020), 23.3 (2021), 24.2 (2022), 24.3 (2023), 24.4 (2024), 24.6 (2025), 24.7 (2026).
- Total revenues (percent of GDP): 53.6 (2019), 53.3 (2020), 51.5 (2021), 51.1 (2022), 50.6 (2023), 50.0 (2024), 49.9 (2025), 49.8 (2026).
- Total expenditures (percent of GDP): 49.5 (2019), 53.4 (2020), 51.0 (2021), 50.5 (2022), 50.4 (2023).
- Overall balance (percent of GDP): 4.1 (2019), -0.2 (2020), 1.1 (2021).
- Gross debt (percent of GDP): 33.6 (2019), 42.1 (2020), 36.7 (2021), 32.3 (2022), 33.1 (2023), 32.9 (2024), 32.8 (2025), 32.7 (2026).
Financial sector, housing, and macroprudential recommendations
- Directors commended the resilience of the banking system.
- Recommended implementation of additional prudential tools, including:
- Revisiting sectoral systemic risk buffers.
- Introducing a fully risk-based prudential framework.
- Risks from the housing market noted: high household leverage and increases in risky mortgages.
- Recommended macroprudential tightening together with structural reforms to increase supply of affordable housing and strengthen the tax code.
- Specific borrower- and mortgage-related recommendations:
- New mortgages extended to highly-leveraged households should be subject to minimum down-payment requirements or mandatory amortization until a minimum equity share is reached.
- Reduce mortgage interest deductibility.
- Introduce borrower-based tools.
Labor market and structural reform advice
- Directors supported labor market reforms that improved employment prospects of the young, the low-skilled, and the foreign-born.
- To ensure adequate labor supply, any changes to indexation of the statutory retirement age to life-expectancy should be consistent with long-term fiscal sustainability.
- Recommended reducing labor taxes.
- Commended Denmark’s ambitious green and digital transformation plans; a prompt decision on carbon pricing would further incentivize private-sector green investment.
- To boost productivity growth, recommended:
- Enabling high productivity sectors to expand by encouraging broad-based innovation.
- Improving access to equity finance and accelerator capital.
- Rebalancing taxation.
Selected economic indicators, 2019–27 (key series, as published)
- Real GDP (change in percent): 2.1 (2019), -2.1 (2020), 4.7 (2021), 3.2 (2022), 1.5 (2023), 1.8 (2024).
- Final domestic demand (change in percent): 1.0 (2019), 0.0 (2020), 4.3 (2021), 2.8 (2022), 1.9 (2023).
- Private consumption (change in percent): 1.2 (2019), -1.3 (2020), 4.2 (2021), 3.6 (2022), 2.3 (2023), 2.2 (2024).
- Public consumption (change in percent): -1.7 (2019), 3.7 (2020), 0.3 (2021), 0.9 (2022).
- Gross fixed investment (change in percent): 0.1 (2019), 5.1 (2020), 5.6 (2021), 3.8 (2022), 2.7 (2023), 3.0 (2024).
- Output gap (percent of potential output): 1.6 (2019), 0.6 (2020), 0.5 (2021).
- Harmonized unemployment rate (percent): 5.0 (2019), 5.7 (2020).
- GDP deflator (change in percent): 0.7 (2019), 2.6 (2020), 2.4 (2021), 4.4 (2022), 2.0 (2023).
- CPI (year average): 4.8 (value year not explicitly matched in table).
- Domestic credit growth (end of year): 1.3 (2019), 3.1 (2020).
- M3 growth (end of year): 12.3 (2019), -0.9 (2020).
- Trade balance, goods and services (percent of GDP): 7.4 (2019), 6.5 (2020), 6.7 (2021), 6.3 (2022), 6.1 (2023), 5.9 (2024).
- Exports of goods & services (percent of GDP): 59.0 (2019), 54.9 (2020), 59.6 (2021), 61.8 (2022), 62.0 (2023), 61.9 (2024), 61.7 (2025), 61.6 (2026), 61.3 (2027).
- Imports of goods & services (percent of GDP): 51.6 (2019), 48.4 (2020), 52.9 (2021), 55.5 (2022), 55.9 (2023), 56.0 (2024), 55.7 (2025).
- Current account (percent of GDP): 8.8 (2019), 8.1 (2020), 8.3 (2021), 7.1 (2022), 6.9 (2023), 6.6 (2024).
- Nominal GDP (Bln DKK): 2318 (2019), 2330 (2020), 2497 (2021), 2690 (2022), 2787 (2023), 2894 (2024), 3008 (2025), 3128 (2026), 3254 (2027).
- GDP (Bln USD): 348 (2019), 356 (2020), 397 (2021).
- GDP per capita (USD): 59862 (2019), 61154 (2020), 67997 (2021).
IMF Press Release No. 22/197, June 15, 2022.