Country Risk Rating

A2
The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average. - Source: Coface

Business Climate Rating

A1
The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

  • World’s largest shipping operator (2020)
  • Almost energy self-sufficient (oil and gas in the North Sea and Greenland, as well as numerous wind-energy parks)
  • Niche industries with cyclically non-sensitive export goods (e.g. pharmaceuticals, wind turbines, food products)
  • Well managed public finances
  • Large current account surplus
  • Krone pegged to the euro

Weaknesses

  • Small open economy sensitive to external demand, especially from Germany and Sweden
  • Strong fragmentation of parliament, making coalition building difficult (threshold to enter the parliament is only 2% for a party, 4 extra seats for Faroe Islands and Greenland)
  • Very high household debt (215% of disposable income, 2020)
  • Public sector constitutes a significant part of the country’s employment (32% of employees at mid-2021)
  • High but mostly private external debt (157% of GDP, 2020)
  • Strengthening independence movement in Greenland

Current Trends

A more sustainable growth path after the strong 2021 rebound

The year 2021 brought a surprisingly strong rebound from the pandemic. Thanks to relatively good pandemic management, with 86% of the adult population fully vaccinated by mid-November 2021, the basis for economic recovery was favourable. Furthermore, the focus of the Danish manufacturing sector on pharmaceuticals (18% of all exports) and machines for renewable energy (13%), which are less dependent on scarce input goods like computer chips, turned out to be a strategic advantage last year. Moreover, the strong export relations of Denmark to well-developed Northern Europe supported growth. Therefore, GDP already reached pre COVID-19 levels in Q2 2021. While this positive economic development should continue in 2022, the strong growth rate of 2021 cannot be maintained. Private consumption should still increase moderately, but no boom. The Danes have not much changed their consumption behaviour in the second half of 2021, although strong savings and early holiday allowance payouts gave them the financial opportunity. Support for consumption comes from the labour market, as the unemployment rate should reach its lowest level since early 2009 this year. This will lead to stronger wage growth. However, some of this higher purchasing power will be balanced out by stronger inflation, which should mainly come from higher energy prices, a tax increase on tobacco in January and high industrial input prices that are passed on to the consumers. Machinery and equipment investments, as well as construction, should also progress moderately. The EU Recovery and Resilience Facility plan for Denmark was approved in June 2021 leading to the disbursement of EUR 1.5 billion (0.5% of GDP, 0.2% for 2022) in grants over the period 2021-2026 to mainly finance projects to support the climate objectives and digitalization. While net exports should still contribute to GDP growth, albeit to a lesser extent than in 2021 due to stronger imports, the main change should come from the public sector. According to the budget plan of the government, public spending should decrease from DKK 1,222 billion (49% of GDP) last year, to DKK 790 billion (30% of GDP) this year, due to the phasing out of many pandemic-related support measures. The main initiatives in 2022 will be investments into education, green technology and retraining measures for unemployed people. The central bank of Denmark had increased its policy rate by 10 basis points to 0.7% in March 2021 before returning to 0.6% in September to hold the Danish krone’s peg with the euro (its main target). Furthermore, the central bank intervened in most months to sell DKK on the FX market in 2021. This year, the work of the monetary policymakers should become a bit easier, when the ECB finishes its Emergency Purchasing Programme, diminishing the appreciation pressure on the DKK.

The public budget returns to a surplus

After two years of small deficits, the public budget balance should turn positive again in 2022 due to decreased expenditures and increasing tax revenues (starting April, companies that postponed their tax payments during the recession will have to slowly catch up with their arrears). Gross public debt will therefore shrink further and remain very low in European comparison. The current account surplus should remain high. While the goods trade surplus should decrease and transfer payments should increase, this should be levelled out by higher exports of services thanks to tourism and expensive shipping services, as well as higher income from Danish overseas investments.

Social-democratic government with a conservative policy

Since June 2019, Prime Minister Mette Frederiksen from the Social Democratic Party (SD) is leading a minority government with the support of the other “red-block” parties: the Social Liberal Party, the Socialists People’s Party, the Red-Green Alliance and three single parties from Greenland and the Faroes Islands. Thanks to the overall successful handling of the pandemic, popular support for the SD has remained high. In addition, the government co-opted many right-wing immigration policies: for instance, in September 2021, the government announced a plan that would force more migrants (targeting women especially) to work to be eligible for state benefits. This popular position, in combination with a divided conservative/right-wing opposition, contributes to a clear lead of the SD in the polls. However, investigations are going on about Frederiksen’s illegal order to kill all living mink in Denmark in November 2020, as a prophylactic measure to avoid a further spread of a new mutation of the COVID-19 virus. It is unclear if Frederiksen knew that her order was illegal when she gave it, or if she realized it later on. Nevertheless, it is expected that Frederiksen will remain in office until the next regular election in 2023.

Source:

Coface (03/2022)
Denmark