Denmark: Risk Assessment
Country Risk Rating
Business Climate Rating
- World’s fifth largest shipping operator
- Energy self-sufficiency (oil in the North Sea and Greenland) and net energy exporter
- Niche industries (renewable energy/biotechnology)
- Well managed public finances
- Large current account surplus
- Small open economy sensitive to external demand
- Government instability linked to the fragmentation of Parliament
- Very high household debt levels (240% of disposable income)
- Public sector strongly represented in job market (30% of employees)
- Tensions over housing in certain cities
Internal Demand Boosts Activity
In 2018, growth will remain vigorous, buoyed by private consumption and investment. Private consumption will be sustained by historically low interest rates (key rate: 0%; interest on bank deposits with the central bank: -0.65% since February 2015), higher wages, as well as low unemployment (4.4% in September 2017). Moderate inflation will help significantly increase household disposable income, also sustained by lower income taxes in 2018 as agreed by the government. Moreover, households will benefit from the wealth effect associated with property prices, as well as more flexible credit conditions thanks to deleveraging since 2014, although household debt is still the highest in the OECD (240% of disposable income). Higher capacity utilization, as well as the shortage of labor, will encourage private investment in the industrial sectors (pharmaceuticals, capital goods). The transport sector (50% of services) will benefit from the recovery in world trade, on which it is heavily reliant. Residential construction will be especially dynamic due to the recovery in property prices and the improved financial position of households. However, the energy sector (oil and gas) will represent a smaller and smaller share of the economy and will still be affected by weak commodity prices. Improved economic conditions in the main partner countries are expected to sustain exports, while the country’s competitiveness remains satisfactory.
Low inflation means the central bank can maintain its very accommodative monetary policy, in line with that of the ECB and maintain the Danish krone’s peg to the euro. This policy has enabled export competitiveness to be maintained while supporting domestic demand.
Large Current Account Surplus and Healthy Public Finances
The government is expected to maintain a cautious fiscal policy, in order to prevent the economy from overheating, given the low unemployment rate. The slight increase in spending is expected to be concentrated in two areas: security, by means of higher allocations to defense, and the recruitment of more tax administration staff following a scandal in 2017 over poor tax collection. New tax measures were also announced in the Strategic Plan (2017-2025). These comprise, specifically, cuts to income tax as well as twenty-two initiatives designed to foster long-term growth. All these measures will be financed by cuts in funding for the public rail company and by reducing social transfers abroad. As a result, the deficit and the public debt will remain broadly below the threshold set by the European Stability and Growth Pact (3% and 60% of GDP respectively).
There will still be a substantial current account surplus in 2018. Lively export momentum will help maintain a trade balance surplus (5.3% of GDP), even if imports will also rise, stimulated by consumption and investment. Exports of agricultural products (pork, milk) will be the least dynamic, especially those to Asian countries and Germany. Machinery and transport equipment will also be among the top exports, as will chemical products (biotechnology). Nevertheless, Brexit could have a negative impact on export items due to lower demand from the United Kingdom (4th biggest export market). External debt is still considerable (130% of GDP), even though it has fallen strongly since 2013. Two thirds of this can be attributed to the Danish financial sector because of the interconnection between the Nordic banking sectors.
A Weak Government Coalition, Dependent on the Support of the Extreme Right
Prime Minister Lars Lokke Rasmussen has led a center-right coalition government since 2016, made up of his party (Liberal Party), the Liberal Alliance (LA) and the Conservative People’s Party (KF). This coalition is in the minority as it brings together only 53 MPs out of 179. However, it benefits from the support of the extreme right, the Danish People’s Party (DF), which has 37 MPs but does not want to participate in government. Significant disagreements between the different coalition parties, combined with the demands of the extreme right-wing party (DF) leave the prime minister little leeway for reforming the country. Effectively, the implementation of the government’s Strategic Plan (2017-2025) could be strongly compromised by these disagreements. The persistence of these splits could lead to early elections in 2018. Greenland’s desire for independence (the Arctic is a region potentially rich in natural resources) will also be a major challenge, which Denmark will have to resolve in the medium term.