Moderate economic growth in 2016 and
Denmark’s economy is back on track, although to a less dynamic
extent than other Scandinavian neighbors such as Sweden or Norway.
In Q1 and Q2 2016, the Danish economy expanded by +0.7% q/q and
+0.5% q/q respectively, thanks to positive net exports (+0.2pp in
Q1 and +0.8pp in Q2) and supportive public spending. Consumer
spending has been dynamic in Q1 (+0.5% q/q) before slowing down in
Q2 (+0.2% q/q). However, the fall in the unemployment rate (6.2% in
Q2), the return to positive growth in real wages (annual average of
1%), the low interest rates and rising house prices (average annual
rise of above +4%) should support consumer spending going forward.
Capacity utilization rate rose above its historical average in Q3
2016 (at 81%), which suggests a pick-up in firms appetite for
Risks still stem from the high debt burden of non-financial
companies (240% of total income for net NFC debt) and falling
profitability. Turnover growth is recovering and a pick-up in
inflation should support firms’ pricing power. Business
insolvencies are expected to fall by -7% in 2017.
Fiscal stimulus in the pipeline:
Healthy public finances, especially compared to the rest of the EU,
provide room for fiscal stimulus. Prime Minister Lars Lokke
Rasmussen has initiated negotiations within his ruling coalition to
adopt a 10-year economic plan that should boost the economy up
until 2025. The Liberal party proposes to (i) cut income tax and
the top marginal tax rate to 10% from 15%, (ii) increase public
spending by 0.5% per year to DKK22bn in 2025, with a focus on care
for the elderly, education and security; (iii) raise the retirement
age to 67.5 years in 2025, up from 67, and to 68 years in
The coalition partner, the Conservative’s People Party, pushes for
more spending on pensions. Should these negotiations be successful,
the plan could boost the economy by DKK65bn (3.2% of GDP). Failure
to come to a compromise could lead to a break-up of the ruling
coalition and elections by the end of 2016.
Brexit remains a downside risk
The UK plays an important role for all four Nordic countries as it
stands among the TOP 5 export markets for the region. Norway and
Denmark are exposed more than others. The UK is the first export
market for Norway (21% of total exports) mainly through the oil
market. The British economy is the 3rd biggest destination for
Danish exports (7% of total exports).
GBP depreciation could translate into lower export growth for
Denmark. Brexit’s overall impact could reach from –DKK2.7bn to
–DKK3.5bn depending on the UK’s trade relationship with the EU post
exit (see Figure 3). Subdued demand in the UK due to uncertainty
along with the currency’s depreciation can impact the most exposed
sectors: agri-food, energy, and machinery.