Denmark: Risk Assessment
Country Risk Rating
Business Climate Rating
- World’s second largest shipping operator (2018)
- Almost energy self-sufficient (oil and gas in the North Sea and Greenland)
- Niche industries with cyclically non-sensitive export goods
- Well managed public finances
- Large current account surplus
- Krone pegged to the euro
- mall open economy sensitive to external demand, especially to UK and the looming Brexit
- Government instability related to the fragmentation of parliament (threshold for the parliament is only 2% for a party; 4 extra seats for Faroer Islands and Greenland)
- Very high household debt (281% of disposable income, 2018)
- Public sector constitutes a significant part of the country’s employment (26% of employees in mid of 2019)
- High external debt (145% of GDP, 2018)
- Strengthening independence movement in Greenland
Economy bucks the trend, but this is unlikely to last
The Danish economy seems to be resilient towards the global growth headwinds thanks to its specialization on export goods such as pharmaceuticals and wind turbines (both around 13% of total goods exports) that are quite robust against cyclical changes. Nevertheless, the declining global trade will increasingly affect shipping, one of the biggest industries in Denmark, which accounts for 50% of total service exports. The subdued growth in the main export destinations should lead to a slower trade growth in goods exports in 2020 too, which should dampen the overall GDP result in 2020. Even then, GDP remains on a high level, thanks to the constant robust personal consumption. Here, several factors are pulling in different directions. On the positive side, the interest rates are very low. To hold the krone in a peg with the euro, the Danish National Bank has to, more or less, copy the monetary policy of the ECB. This led to a cut of the certificates of deposit rate from -0.65% to -0.75% in September 2019. The DNB monetary policy, parallel to the ECB policy, should remain unchanged in 2020. Additionally, the price pressure should stay low in 2020, except for smokers. The government decided to increase the price of a pack of cigarettes by 12.5% (5 DKK) in January 2020, which will be mirrored by a small increase in the inflation rate. At the end of the year, a payment of property tax rebates is planned, which should foster private consumption too. However, wage increase should be subdued in 2020, as the labor force is increasing due to a gradual increase of the retirement age towards 67 in 2022. Additionally, the private household debt remains immense. Therefore, only a moderate private consumption is expected in 2020. The government plans higher spending on environment protection and welfare, which should also foster GDP growth. Private investments were negative in 2019 and should show some mild rebound in 2020. Housing investments however, will not continue at this level, as prices are slowly relaxing, with a huge numbers of new residents now fresh on the market.
Healthy fiscal policy and a substantial current account surplus
The government plans several spending projects for 2020 especially in the area of climate (i.e. research projects), welfare (more staff for kindergartens, support of low-income families), education and security (more financial support for the police). This additional spending should be financed by a rollback of reductions to inheritance taxes and by high revenues from the pension return tax. The latter has probably reached a record high in 2019, thanks to a very good performance of the equity markets, and contributed to a strong budget surplus. Denmark continues to run a large current account surplus in 2019/2020, thanks to a strong performance of the goods trade balance, where exports are showing an elevated dynamic and are easily outpacing robust imports. The surplus of the service balance, however, seems to be more affected by the slowdown of the main trading partners, and decreased in 2019. The income balance is also in surplus, thanks to the income of Danish companies abroad. Nevertheless, due to the challenging international environment the surplus is decreasing.
Minority government in a 15-party parliament
The Social Democratic Party (SD), led by the new Prime Minister Mette Frederiksen, won the general election in June 2019. The election result led to an exchange of power in the parliament from the conservative “blue bloc” to social-democratic-left “red block”. The SD, with its 48 out of 179 seats, has formed a minority government (which is customary in Denmark) with the support of the Social Liberal Party (16 seats), the Socialists People’s Party (14 seats), the Red-Green Alliance (13 seats), and three single parties from Greenland and the Faroes Islands. Together the red block has 94 seats in parliament. The opposition consists of the conservative-liberal party “Venstre” (43 seats) from former Prime Minister Rasmussen, the right-wing Danish People’s Party (16 seats), the Conservative People’s Party (12 seats), the green party “Alternative” (5 seats) and the right-wing party “New Right” (4 seats). The SD-government is aiming at a mixed policy, with higher spending on welfare and environmental protection on the one hand, but maintaining the previous government’s hard-line stance on immigration (especially illegal) on the other. The latter aspect could be the touchstone for the relationship of the SD with the other red-block parties. Nevertheless, the last governments have proved to be robust and maintained until the end of their term, which would be in Frederiksen’s case June of 2023.