IMF Executive Board Concludes 2022 Article IV Consultation with Denmark
June 15, 2022
Washington, DC : The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Denmark on June 13, 2022.
Denmark’s strong economic recovery has raised economic activity above pre-pandemic levels. The rebound in activity was led by strong domestic demand. Private consumption normalized amid easing of containment measures. Investment remained solid as economic prospects brightened. Public consumption also had a positive impact as the pandemic support continued. At the same time, inflation was propelled to a historic high by soaring energy prices and labor market pressures increased. The current account continues to be in surplus. House price growth remains strong and household debt elevated.
The outlook is for the rebound in activity to continue but risks remain high amid the war in Ukraine and pandemic-related uncertainty . Given Denmark’s small direct exposures to Russia and Ukraine, the impact of the war is expected to be limited. Amid the lifting of all pandemic-related restrictions, near-term growth—led by private consumption and investment—is projected to be strong, around 3.2 and 1.5 percent in 2022 and 2023, respectively. Lower demand from main trading partners—notably Germany—will weigh on Danish exports. Public consumption will retreat as the unwinding of COVID-support measures more than offsets war-related spending. Headline inflation is projected to rise appreciably this year—close to 5 percent—mainly due to surging energy prices. The planned fiscal tightening will help ease labor market pressures. But the balance of risks around the outlook is tilted to the downside. A further escalation of the war remains a key downside risk. Pandemic-related risks continue to be high as well given the possibility of new variants. And, high and increasing household debt remains a key source of risk as housing valuations remain elevated. However, further labor market pressures related to a faster-than-expected rebound are a key upside risk.
Executive Board Assessment [2]
Executive Directors welcomed the authorities’ swift and well-calibrated policy response to the pandemic, which facilitated a strong recovery. At the same time, they noted that uncertainty is high owing to the war in Ukraine and the lingering pandemic, and that the balance of risks is tilted to the downside. Against this background, Directors encouraged the authorities to retain policy flexibility while preserving macro-financial stability and supporting sustainable, inclusive growth.
Given cyclical pressures in the economy, Directors agreed with the planned fiscal tightening in 2022. They underscored, however, the importance of retaining flexibility and recalibrating policies as needed should risks materialize. Directors commended the authorities for their energy compensation scheme, which is small, temporary, and targeted, and agreed that potential additional measures should also be targeted and fiscally neutral.
Directors agreed that the exchange rate peg has served Denmark well, providing a framework for historically low and stable inflation, and that monetary policy should stand ready to maintain it.
Directors commended the resilience of the banking system and recommended implementing additional prudential tools, including revisiting sectoral systemic risk buffers and introducing a fully risk-based prudential framework. They welcomed the authorities’ progress in implementing AML/CFT recommendations by adopting a new risk assessment model.
Directors noted the risks stemming from the housing market, with high household leverage and increases in risky mortgages. They saw scope for macroprudential tightening together with structural reforms to increase the supply of affordable housing and strengthen the tax code. Directors agreed that new mortgages extended to highly-leveraged households be subject to minimum down-payment requirements or mandatory amortization until a minimum equity share is reached, as well as reducing mortgage interest deductibility and introducing borrower-based tools, would help address risks.
Directors supported the authorities’ labor market reforms that improved employment prospects of the young, the low-skilled, and the foreign-born. To ensure adequate labor supply, they considered that any changes to the indexation of the statutory retirement age to life-expectancy should be consistent with long-term fiscal sustainability, and also recommended reducing labor taxes.
Directors commended Denmark’s ambitious green and digital transformation plans. They noted that a prompt decision on carbon pricing would further incentivize the private sector to step up green investment. To further boost productivity growth, Directors recommended enabling high productivity sectors to expand by encouraging broad-based innovation, improving access to equity finance and accelerator capital, while rebalancing taxation.
[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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Denmark: Selected Economic Indicators, 2019–27 |
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|
2019 |
2020 |
2021 |
2022 |
2023 |
2024 |
2025 |
2026 |
2027 |
|
|
|
|
proj. |
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|
Supply and Demand (change in percent) |
|||||||||
|
Real GDP |
2.1 |
-2.1 |
4.7 |
3.2 |
1.5 |
1.8 |
1.8 |
1.8 |
1.8 |
|
Final domestic demand |
1.0 |
0.0 |
4.3 |
2.8 |
1.9 |
2.1 |
2.1 |
2.1 |
2.1 |
|
Private consumption |
1.2 |
-1.3 |
4.2 |
3.6 |
2.3 |
2.2 |
2.2 |
2.2 |
2.2 |
|
Public consumption |
1.5 |
-1.7 |
3.7 |
0.3 |
0.3 |
0.9 |
0.9 |
0.9 |
0.9 |
|
Gross fixed investment |
0.1 |
5.1 |
5.6 |
3.8 |
2.7 |
3.0 |
3.0 |
3.0 |
3.0 |
|
Net exports 1/ |
1.4 |
-2.0 |
0.4 |
-0.7 |
-0.1 |
0.0 |
0.0 |
0.1 |
0.1 |
|
Gross national saving (percent of GDP) |
30.8 |
31.1 |
31.6 |
31.4 |
31.2 |
31.2 |
31.2 |
31.2 |
31.2 |
|
Gross domestic investment (percent of GDP) |
22.0 |
22.9 |
23.3 |
24.2 |
24.3 |
24.4 |
24.6 |
24.6 |
24.7 |
|
Potential output |
1.9 |
1.7 |
1.9 |
2.1 |
2.2 |
2.2 |
2.2 |
1.9 |
1.8 |
|
Output gap (percent of potential output) |
1.6 |
-2.1 |
0.6 |
1.6 |
0.9 |
0.5 |
0.1 |
0.0 |
0.0 |
|
Labor Market (change in percent) 2/ |
|||||||||
|
Labor force |
1.6 |
-0.4 |
0.6 |
1.0 |
0.5 |
0.1 |
0.1 |
0.1 |
0.1 |
|
Employment |
1.7 |
-1.1 |
1.2 |
1.0 |
0.5 |
0.2 |
0.1 |
0.1 |
0.1 |
|
Harmonized unemployment rate (percent) |
5.0 |
5.7 |
5.1 |
5.1 |
5.1 |
5.0 |
5.0 |
5.0 |
5.0 |
|
Prices and Costs (change in percent) |
|||||||||
|
GDP deflator |
0.7 |
2.6 |
2.4 |
4.4 |
2.1 |
2.0 |
2.1 |
2.2 |
2.2 |
|
CPI (year average) |
0.7 |
0.3 |
1.9 |
4.8 |
1.7 |
1.8 |
1.9 |
1.9 |
1.9 |
|
Public Finance (percent of GDP) 3/ |
|||||||||
|
Total revenues |
53.6 |
53.3 |
53.3 |
51.5 |
51.1 |
50.6 |
50.0 |
49.9 |
49.8 |
|
Total expenditures |
49.5 |
53.4 |
51.0 |
50.5 |
50.5 |
50.4 |
50.0 |
50.0 |
49.9 |
|
Overall balance |
4.1 |
-0.2 |
2.3 |
1.1 |
0.6 |
0.2 |
0.0 |
-0.1 |
-0.1 |
|
Primary balance 4/ |
3.8 |
-0.5 |
1.9 |
0.8 |
0.3 |
0.0 |
-0.2 |
-0.3 |
-0.3 |
|
Cyclically-adjusted balance (percent of potential GDP) |
2.9 |
1.4 |
1.9 |
-0.1 |
-0.1 |
-0.2 |
-0.1 |
-0.1 |
-0.1 |
|
Structural balance (percent of potential GDP) 5/ |
0.6 |
-0.4 |
-1.4 |
-0.4 |
-0.2 |
-0.1 |
0.0 |
-0.1 |
-0.1 |
|
Gross debt |
33.6 |
42.1 |
36.7 |
32.3 |
33.1 |
32.9 |
32.8 |
32.7 |
32.8 |
|
Money and Interest Rates (percent) |
|||||||||
|
Domestic credit growth (end of year) |
4.3 |
1.3 |
3.1 |
… |
… |
… |
… |
… |
… |
|
M3 growth (end of year) |
2.6 |
12.3 |
-0.9 |
… |
… |
… |
… |
… |
… |
|
Short-term interbank interest rate (3 month) |
-0.4 |
-0.4 |
-0.5 |
… |
… |
… |
… |
… |
… |
|
Government bond yield (10 year) |
-0.2 |
-0.5 |
-0.3 |
… |
… |
… |
… |
… |
… |
|
Balance of Payments (percent of GDP) |
|||||||||
|
Exports of goods & services |
59.0 |
54.9 |
59.6 |
61.8 |
62.0 |
61.9 |
61.7 |
61.6 |
61.3 |
|
Imports of goods & services |
51.6 |
48.4 |
52.9 |
55.5 |
55.9 |
56.0 |
56.0 |
55.9 |
55.7 |
|
Trade balance, goods and services |
7.4 |
6.5 |
6.7 |
6.3 |
6.1 |
5.9 |
5.7 |
5.7 |
5.7 |
|
Oil trade balance |
-0.5 |
-0.5 |
-1.0 |
-1.8 |
-1.8 |
-1.8 |
-1.9 |
-2.0 |
-2.1 |
|
Current account |
8.8 |
8.1 |
8.3 |
7.1 |
6.9 |
6.7 |
6.6 |
6.5 |
6.5 |
|
International reserves, changes |
-0.9 |
-0.1 |
3.7 |
… |
… |
… |
… |
… |
… |
|
Exchange Rate |
|||||||||
|
Average DKK per US$ rate |
6.7 |
6.5 |
6.3 |
… |
… |
… |
… |
… |
… |
|
Nominal effective rate (2010=100, ULC based) |
99.4 |
100.3 |
100.1 |
… |
… |
… |
… |
… |
… |
|
Real effective rate (2010=100, ULC based) |
93.3 |
94.1 |
97.5 |
… |
… |
… |
… |
… |
… |
|
Memorandum Items |
|||||||||
|
Nominal GDP (Bln DKK) |
2318 |
2330 |
2497 |
2690 |
2787 |
2894 |
3008 |
3128 |
3254 |
|
GDP (Bln USD) |
348 |
356 |
397 |
… |
… |
… |
… |
… |
… |
|
GDP per capita (USD) |
59862 |
61154 |
67997 |
… |
… |
… |
… |
… |
… |
|
|
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Sources: Danmarks Nationalbank, Eurostat, IMF World Economic Outlook, Statistics Denmark, and Fund staff calculations. |
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1/ Contribution to GDP growth. |
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2/ Based on Eurostat definition. |
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3/ General government. |
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4/ Overall balance net of interest. |
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5/ Cyclically-adjusted balance net of temporary fluctuations in some revenues (e.g., North Sea revenue, pension yield tax revenue) and one-offs. Covid-related one-offs are not excluded. |
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