IMF Executive Board Concludes 2021 Article IV Consultation with Denmark

Washington, DC: On June 14, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Denmark and endorsed the staff appraisal without a meeting.

Denmark entered the pandemic on a strong economic footing. The authorities decisively utilized Denmark’s large policy space built over time to successfully navigate the crisis and lay the ground for a strong recovery. With one of the smallest contractions in Europe, the decline in real GDP in 2020 was mainly driven by weak private consumption and net exports. The swift and sizable fiscal response cushioned the impact on activity. Fiscal policy continues to support the recovery and public debt is sustainable. Unprecedented policy measures supported the labor market; thus, unemployment increased only slightly. The current account surplus declined mainly due to lower services’ exports, but it remains high. A comprehensive financial policy package-together with measures to support households and corporates-helped mitigate financial stability risks. Macrofinancial vulnerabilities stem largely from accelerating housing price growth amid high and increasing household leverage.

The near-term outlook is for a rebound in activity. This is predicated on the continued rollout and increased availability of the vaccine by the second half of the year. With the expected lifting of restrictions, output growth is projected to rebound to 2.6 and 3.3 percent in 2021 and 2022 respectively. Activity will be supported by a recovery of private consumption and net exports. The momentum in investment should strengthen in 2022 on the back of various initiatives that incentivize green investment and digitalization. The labor market will continue to improve, supporting wages. With the projected recovery, the negative output gap is estimated to close by 2022. Thanks to various initiatives to raise investment and labor supply, potential growth will pick up in the medium term, thus helping to limit scarring from the pandemic.

Executive Board Assessment [2]

In concluding the Article IV consultation with Denmark, Executive Directors endorsed the staff’s appraisal as follows:

Activity declined in 2020 driven by weak private consumption and net exports. But the contraction was milder than in peer countries, in part, thanks to unprecedented policy support that has cushioned the impact of the pandemic. The external position was stronger than the level consistent with medium-term fundamentals and desirable policies. The near-term outlook is for a rebound in activity, but risks remain high and dominated by pandemic developments. High and increasing household debt amid accelerating housing valuations remains a key vulnerability. Policies should support the recovery, safeguard the most vulnerable groups, enhance macrofinancial resilience, and facilitate green and digital transitions.

Denmark’s public finances are sound with substantial fiscal space to support the recovery and facilitate the economy’s green and digital transformations . Fiscal policy should prioritize COVID crisis support, facilitate reallocation, and support reforms for the economic transformation. If the recovery falters, Denmark should deploy its substantial fiscal space as needed. Once the recovery is fully entrenched, a plan to return to the medium-term objective of neutral stance remains appropriate.

The fixed exchange rate policy has served Denmark well. The policy provides a framework for low and stable inflation in Denmark.

The banking system is profitable, liquid, and highly capitalized, though in a challenging environment. Measures to support households and corporates mitigated liquidity and credit risks but impairments are likely to increase further once policy support is unwound. As the recovery solidifies, targeted prudential tools should be deployed to maintain financial stability. Staff welcome improvements to the AML/CFT framework which led to a third consecutive FATF upgrade. The robust implementation of reforms should continue.

High and increasing household leverage amid accelerating housing valuations warrant tightening prudential tools and deploying coordinated tax and housing supply policies. The authorities should shift focus toward income-based measures, as LTV caps are less binding in the current environment with high house price growth. The authorities should tighten DTI restrictions for all loans irrespective of LTV ratios. DTI caps could be differentiated based on borrowers’ riskiness. Tighter limits on income-based measures for interest-only and floating-rate mortgages should also be considered. Mortgage interest deductibility should be reduced in a manner consistent with the overall tax framework. Policies to promote housing supply should be considered.

As the recovery gains traction, labor market policies should be fine-tuned, shifting emphasis from exceptional support to other measures embedded in flexicurity. Enhancements to the flexicurity model along with complementary policies helped cushion the impact of the pandemic on the labor market. Once the recovery is entrenched, exceptional support should sunset. More focus should be given to measures in flexicurity that facilitate matching and the reallocation of labor from contracting to expanding sectors through upskilling and education especially for the young, unskilled and foreign-born. To support labor supply over the long-term, it is critical to continue with the implementation of the pension reform that links retirement age to life-expectancy. Other measures, that would increase labor supply and alleviate inactivity traps should be considered, including a comprehensive tax reform that uses targeted in-work benefits. Improvements to the provision of after-hours public childcare should be pursued. Simplifying the certification of foreign degrees would help attract skilled foreign labor.

The recovery offers a unique opportunity to address pre-pandemic legacies and build forward better by boosting productivity growth and investments. More is needed to achieve Denmark’s highly ambitious climate goals. Hence, public investment should be raised as much as efficiently possible, while being compliant with the Budget Law and the medium-term objective. A prompt definition of the tax framework for green investment, including the level and base of carbon taxation would reduce uncertainty and provide further incentives for private investments. To further boost productivity growth, the authorities should continue to foster the environment for high productivity sectors to expand, encourage broad-based innovation, and improve access to equity finance. By reducing the cap on the use of carry-forward losses more start-up and high technology firms could be fostered. Consideration should be given on how to implement an ACE, as it would reduce the debt bias and the cost of capital.

Denmark: Selected Economic Indicators, 2018-26

2018

2019

2020

2021

2022

2023

2024

2025

2026

est.

proj.

Supply and Demand (change in percent)

Real GDP

2.2

2.9

-2.7

2.6

3.3

1.9

1.8

1.8

1.8

Final domestic demand

2.5

1.7

-0.5

2.7

2.6

2.3

2.1

2.1

2.1

Private consumption

2.7

1.4

-1.9

2.8

3.6

2.3

2.2

2.2

2.2

Public consumption

0.3

1.2

-0.1

3.2

0.1

0.9

0.9

0.9

0.9

Gross fixed investment

4.8

2.8

2.1

2.1

3.5

3.7

3.0

3.0

3.0

Net exports 1/

-0.5

1.7

-2.1

0.1

0.2

0.1

0.1

0.1

0.1

Gross national saving (percent of GDP)

30.2

31.6

31.0

30.8

31.0

31.0

31.0

31.0

31.0

Gross domestic investment (percent of GDP)

23.1

22.7

23.2

23.0

23.6

23.6

23.7

23.8

23.9

Potential output

1.8

1.8

1.7

1.8

2.2

1.9

1.8

1.8

1.8

Output gap (percent of potential output)

1.7

2.8

-1.7

-1.0

0.0

0.0

0.0

0.0

0.0

Labor Market (change in percent) 2/

Labor force

0.9

1.5

-0.2

0.2

0.4

0.4

0.4

0.4

0.4

Employment

1.7

1.6

-0.8

0.3

0.6

0.6

0.6

0.4

0.4

Harmonized unemployment rate (percent)

5.1

5.0

5.6

5.6

5.4

5.2

5.0

5.0

5.0

Prices and Costs (change in percent)

GDP deflator

0.6

0.7

2.3

1.9

1.4

2.1

2.2

2.2

2.2

CPI (year average)

0.7

0.7

0.3

1.1

1.5

1.8

2.0

2.0

2.0

Public Finance (percent of GDP) 3/

Total revenues

51.2

53.0

52.8

50.9

50.2

50.1

49.7

50.1

50.1

Total expenditures

50.5

49.2

54.0

54.3

51.1

50.7

50.3

50.1

50.1

Overall balance

0.7

3.8

-1.1

-3.3

-0.9

-0.7

-0.6

0.0

0.0

Primary balance 4/

0.3

3.5

-1.5

-3.6

-1.3

-1.0

-0.9

-0.2

-0.2

Cyclically-adjusted balance (percent of potential GDP)

-0.6

1.7

0.1

-2.6

-1.0

-0.7

-0.6

0.0

0.0

Structural balance (percent of potential GDP) 5/

-0.3

0.5

0.3

-0.5

-0.3

-0.1

-0.1

0.0

0.0

Gross debt

33.8

33.0

42.2

40.7

41.2

41.6

41.8

41.9

41.9

Money and Interest Rates (percent)

Domestic credit growth (end of year)

3.5

4.3

M3 growth (end of year)

-2.9

2.6

Short-term interbank interest rate (3 month)

-0.3

-0.4

Government bond yield (10 year)

0.4

-0.2

Balance of Payments (percent of GDP)

Exports of goods & services

56.3

58.3

54.3

55.7

56.4

56.5

56.6

56.6

56.6

Imports of goods & services

50.4

51.0

47.9

49.1

50.0

50.1

50.3

50.4

50.4

Trade balance, goods and services

5.9

7.4

6.5

6.7

6.4

6.4

6.3

6.3

6.1

Oil trade balance

-0.4

-0.5

-0.4

-0.7

-0.8

-0.8

-0.9

-1.0

-1.1

Current account

7.0

8.9

7.8

7.7

7.3

7.3

7.2

7.2

7.0

International reserves, changes

-0.3

-0.9

-0.1

Exchange Rate

Average DKK per US$ rate

6.3

6.7

Nominal effective rate (2010=100, ULC based)

100.1

99.4

Real effective rate (2010=100, ULC based)

95.5

91.8

Memorandum Items

Nominal GDP (Bln DKK)

2254

2335

2324

2431

2546

2647

2755

2867

2983

GDP (Bln USD)

357

350

GDP per capita (USD)

61731

60300

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.


[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] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.

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