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); net energy exporter
- Niche industries (renewable energy/biotechnology)
- Well managed public finances
- Large current account surplus
- Krone pegged to the euro
- Small open economy sensitive to external demand
- Government instability related to the fragmentation of Parliament
- Very high household debt (272% of disposable income)
- Public sector constitutes a significant part of the country’s employment (30% of employees in August 2018)
- Tensions over housing in some cities
Growth still dynamic, driven by domestic demand
Growth will remain resilient in 2019 thanks to strong private consumption and investment. Household consumption will continue to be driven by a buoyant labor market, characterized by full employment (unemployment rate at 3.9% in September 2018), and the resulting increase in wages. Between three and four million homeowners will receive property tax refunds in 2019, due to the reduction in the tax base, in line with the reform of the property valuation system. Inflation will accelerate slightly but is expected to remain moderate. As a result, the central bank should maintain an accommodative monetary policy in 2019, in line with that of the ECB. In addition to this particularly favorable financial environment – the key interest rate is at a record low 0% –, households will benefit from the wealth effect linked to rising house prices. However, although household debt has been falling since 2014, it remains the highest in the OECD, coming in at 272% of disposable income in 2017. In parallel, investment will be supported by supply constraints, with production capacity utilization rates and recruitment difficulties at their pre-2008 crisis levels. Shipping, which accounts for 50% of exports of services, will be affected by the slowdown in world trade, and the impact will be even greater if protectionist measures are increased. Although house prices have softened in Copenhagen, residential construction is expected to remain brisk thanks to the improvement in the financial situation of households. The energy sector (oil and gas) will benefit from continued high prices. The slowdown in the main partner countries will affect exports and reduce external trade’s growth contribution, which could turn negative.
Prudent fiscal policy and a substantial current account surplus
The government will maintain its prudent fiscal policy and is not expected to increase public spending, in order to avoid a risk of overheating given the low unemployment rate. The few increases will be concentrated in the social sector (healthcare, early childhood, the elderly) and the environment, but will be very limited (less than 0.1% of GDP). The government deficit and public debt, which are both already well below the thresholds set by the European Stability and Growth Pact (3% and 60% of GDP respectively), will continue their downward trend.
Denmark will continue to run a large current account surplus in 2019. The trade balance will still generate a significant surplus (over 6% of GDP), although imports, driven by domestic demand, are expected to be more dynamic than exports. Exports will be hurt on the one hand by cooler growth in the EU and the United States, and on the other hand by Brexit, which will reduce demand from the United Kingdom. Exports of agricultural products, including pork and dairy products, which account for 20% of exports to the UK, would be particularly affected if the country leaves without an agreement, as they are subject to substantial customs duties (up to 40% depending on the product). However, exports to the UK have diversified significantly in recent years, with the share of machinery and equipment increasing from 20% to 40% of the total between 2015 and 2017. The income balance is also in surplus, thanks to the income of Danish companies abroad. External debt remains considerable, at around 150% of GDP in the second quarter of 2018, but has been gradually declining since 2013. The Danish financial sector, which is interconnected with its Nordic counterparts, accounts for two-thirds of this debt.
The left slightly ahead in the polls
Prime Minister Lars Lokke Rasmussen leads a center-right government coalition composed of his own Liberal Party, the Liberal Alliance (LA) and the Conservative People's Party (KF). This minority coalition (53 MPs out of 179) depends on the support of the far-right Danish People's Party (DF), which has 37 MPs, but which did not wish to participate in the government. The Prime Minister's term of office, which will end no later than June 2019, has been marked by significant disagreements between the coalition parties, compounded by the demands of the DF. The outcome of the 2019 parliamentary elections – which will be affected by the scandal over money laundering involving the Estonian subsidiary of Danske Bank, Denmark’s leading bank, between 2007 and 2015 – remains uncertain: at the end of October 2018, polls showed 51% support for the left against 49% for the right-wing parties, including the DF. According to the polling data, the balance of power has changed little since the 2015 elections: the Social Democratic Party (SD), led by the former Minister of Employment and then Justice, Mette Frederiksen, is predicted to win, followed by the Liberal Party and the DF in a neck-and-neck race for second.
With local elections confirming Greenland's desire to gradually move towards independence (the Arctic being a region potentially rich in mineral, oil and gas resources), Denmark will inevitably have to address this issue in the medium term.