Denmark: Risk Assessment
Country Risk Rating
Business Climate Rating
- World’s largest shipping operator (2019)
- Almost energy self-sufficient (oil and gas in the North Sea and Greenland)
- Niche industries with cyclically non-sensitive export goods (e.g. pharmaceuticals)
- Well managed public finances
- Large current account surplus
- Krone pegged to the euro
- Small open economy sensitive to external demand, particularly from the UK
- Government instability linked to the fragmentation of parliament (the threshold to enter the parliament is only 2% for a party; 4 extra seats for Faroer Islands and Greenland)
- Very high household debt (265% of disposable income, 2019)
- The public sector constitutes a significant part of the country’s employment (26% of employees as of mid-2019)
- High external debt (143% of GDP, 2019)
- Strengthening independence movement in Greenland
Moderate recovery ahead
In 2021, a continuation of the moderate recovery that started in the second half of 2020 is expected for the Danish economy. This recovery came after the global COVID-19 pandemic had hit Denmark in spring 2020 and that the government decided a lockdown that stopped public life, closed many shops, schools, and limited gatherings. This strategy helped to contain the number of COVID-19 cases to a very modest level. The second wave in the early autumn of 2020, which turned out as significantly stronger than the first, was countered by another lockdown in North Denmark, with limited measures. Because of the lack of consumption, investment, and external trade during the first lockdown, Denmark had entered a severe recession in the first half of 2020. It was partly balanced out by a strong rebound in Q3 2020, as global demand for Danish machinery picked up again and consumption stood up strongly, as Danes stayed at home for their holidays. We still expect a further boost to consumption growth for the fourth quarter of 2020 and the beginning of 2021, as the government decided on the disbursement of frozen holiday pay in Q4 2020 (holiday pays are often saved for the pre-retirement time), of which DKK 39 billion (1.7% of GDP) should actually go into Danish pockets. Furthermore, 800,000 homeowners will receive a refund of overpaid property tax in Q1 2021. Moreover, the unemployment rate already dropped from its peak of 5.3% in May to 4.3% in September 2020 and should fall further, but will not reach the pre-crisis level of 3.1% anytime soon, as several sectors are still struggling with high unemployment (e.g. tourism). The government support of last year should decrease in 2021, as most measures should end in December 2020. Nevertheless, the agreement on the renovation in the social housing sector and the postponement of the increase of the energy tax should further encourage economic recovery. The central bank of Denmark had increased its policy rate by 15 basis points to -0.6% in spring 2020 in order to hold the Danish krone in the peg with the euro (its main target). The monetary policymakers should leave this rate unchanged in 2021, but will probably extend their extraordinary lending facilities, in order to mirror the expected further expansionary measures of the ECB at the end of 2020 or in early 2021.
Back to a strong current account surplus
The current account surplus should return to its generally high level. One reason behind this is the robust export sector that is partly concentrated on pharmaceuticals (16% of all exports) and agricultural/food products (13%). The demand for Danish machinery should pick up as well, as the economies of the main export destinations - Germany, Sweden, and Norway - should recover moderately. However, a Brexit with limited agreements could be one of the main risks for the Danish export sector. The general government deficit remained subdued in 2020, as the government’s relief for business was only used by around 10% of the package. In 2021, the budget balance will improve but stay in the negative area, due to some further expansive measures and reduced revenues. However, it should fall below the Maastricht target of 3% and the public debt level will remain muted.
Popular government coalition with big ecological plans
Prime Minister Mette Frederiksen from the Social Democratic Party (SD) is leading a minority government with the support of the “red-block”, the Social Liberal Party, the Socialists People’s Party, the Red-Green Alliance, and three single parties from Greenland and the Faroes Islands. Since spring 2020, support numbers in polls for the SD skyrocketed and reached 34%, which is one of the highest support shares for a single party in the last 10 years. The early and strong response of the government towards COVID-19 was one reason, another one being Denmark’s participation in a group of countries that promoted an austerity policy within the EU, which decreased the share of grants in the EU’s recovery fund. Furthermore, Denmark could increase its rebate package in the 7-year-budget from DKK 1 billion to DKK 3 billion per year. In mid-July 2020, 95% of the members of parliament voted for a new Climate Act, which declares a 70% reduction of CO2 emissions compared to 1990 over 11 years. This project, and the manner of its implementation, could become an issue between the “red-block”-parties. Nevertheless, Frederiksen should remain in office until the next regular election in 2023.