Denmark: Risk Assessment
Country Rating1
Rating: A2
Business Climate Rating1
Rating: A1
Risk Assessment2
Corporate restocking fueled GDP growth in 2010
After the severe recession in 2009, economic activity recovered in 2010, driven by household consumption (benefiting from generous tax breaks), the restocking process, and the rebound in orders from Denmark's two main trading partners, Germany and Sweden. The economy received substantial support moreover from an exceptional surge in public spending (up nearly 20%) with the fiscal deficit growing in consequence.
Only domestic demand will make a positive contribution to growth in 2011
A growth slowdown is impending in 2011. The budgetary measures taken by the government to reduce the fiscal deficit will weigh on household disposable income and thus on private consumption. The expected increase in wages will not suffice to offset these negative trends. Private spending will also be impeded by the persistence of a relatively high savings rate (about 10%). This precautionary behavior on the part of households appears justified to a substantial degree by their very high debt ratio, some 300% of disposable income. These negative factors will, however, be mitigated by the pursuit of expansionary monetary policy in phase with the policy adopted in the euro zone with 65% of mortgage loans granted on a variable rate basis. The persistence of low interest rates will also foster, again this year, residential investment, which will nonetheless decelerate with housing prices expected to be adjusted accordingly. Unemployment, which increased significantly during the crisis will stabilize at about 6% of the working population. Danish companies, meanwhile, will maintain prudent investment policies, despite the significant increase in production capacity utilization rates. As a result, only purchases of capital goods will begin to recover, albeit timidly. And the growth of exports will not suffice to make up lost ground: it will be undermined by the expected slowdown of European economies (67% of sales abroad), notwithstanding the good trends recorded by German and Swedish demand (about 30% of sales). Net exports will in consequence make a negative contribution to economic growth. The current account will remain largely in surplus - 4.7% - thanks to standout performance by the services sector, and particularly maritime freight, which alone generates 40% of total sales abroad.
Bankruptcies continue to affect the construction industry
The competitiveness of Danish companies has been eroding for several years with wages rising faster in Denmark than in other European countries. Manufacturing industries will likely continue to see their share in the export market shrink. This will also be the case for sectors associated with food and beverages. Of all sectors, construction has been the one where productivity has declined the most. The crisis thus particularly affected this industry, which represents, in conjunction with retailing and transport, three-quarters of total bankruptcies. And bankruptcies continued to rise in 2010, even accelerating in the three-month period ending in September (up 18%). Smaller companies are thus expected to continue to suffer from difficult access to credit, which is expected to remain sluggish despite the improvement in the earnings of large banks. Maritime shipping, hit hard by the crisis, will likely continue to benefit from the recovery of world trade, particularly in the container-carrier segment, even though a slowdown in world trade is expected this year.
Strengths
- Energy independent (natural gas and North Sea Oil)
- Strong public finances, limited public-sector debt
- Flexisecurity (a flexible labor market combined with generous welfare benefits)
- Education system favoring continued training while in employment
- World’s fifth largest maritime nation
Weaknesses
- Few world-class enterprises
- Virtual euro peg of the Danish krone
- Gradual deterioration of the competitiveness of Danish companies
- Excessive household debt
- Working population in decline