Denmark

Resilience to be tested

AA1

LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD351,3bn (World ranking 37, World Bank 2018)
Population 5,8mn (World ranking 113, World Bank 2018)
Form of state Constitutional Monarchy
Head of government Mette Frederiksen (PM)
Next elections 2023, legislative
  • Strong banking sector
  • Strong business environment (flexible employment protection legislation, excellent infrastructure)
  • Diversified export sector, mainly in non-cyclical sectors
  • Healthy public finances
  • High institutional effectiveness
  • Highly skilled workforce
  • Excessive household debt
  • Elevated house valuations
  • Small and open economy
  • High exposure to the UK and Brexit
  • Loss of competitiveness, namely due to high tax burden

A large exposure to trade starts to weigh on economic growth

After growing above potential for three consecutive years, we expect Denmark’s economy  to decelerate slightly in 2019 (+1.4% after +1.5% in 2018), though domestic demand, the main growth driver, will act as a cushion against growing external headwinds. As a small, open economy, very integrated in global supply chains, Denmark is highly exposed to external developments, in particular the economic cycles of Germany, Sweden and the UK, which represent the country’s top three export markets.

Monetary policy is expected to follow the ECB’s dovish tone, given the peg of the Danish krona to the euro. Hence, we would not expect a first rate hike before end-2021. This should keep financial conditions very accommodative. In addition, fiscal policy could become increasingly supportive, given the fiscal balance surplus (+0.5% of GDP in 2019), while public debt is low (at 36% of GDP). The new governing coalition pledged to reverse the austerity cuts of the previous government, committing to increased spending on health and elderly care, and cutting greenhouse gas emissions by 70% before 2030.

Consumers should benefit from positive real purchasing power as nominal wages increase by more than 2% y/y while the inflation rate remains around 1%. The labor market continues to be tight with the unemployment rate at 5.1% in May 2019, 1pp below the long-term average and below the estimated natural rate by the IMF.

Non-financial corporations’ investment reached a very high level of 25% of the value added in 2018, compared to the long-term average of 23%. Turnover growth in the manufacturing sector remains strong (+9% y/y in Q1 2019) despite the deflationary pressures in the region. Denmark’s specialization in non-cyclical industries, with the largest growth coming from pharmaceuticals and capital goods (trains, ships and components for wind turbines), makes industrial production resilient but also puts companies at risk  of subsequent sharp swings for changes in inventories.

Denmark’s overall weak growth, coupled with regulatory changes, exposes companies to higher non-payment risk.  Non-financial corporations’ debt stabilized at a high 114% of GDP and stayed within top 10 of highest stocks of corporate debt in Western Europe. The stock of private sector credit as a percentage of GDP is at levels similar to 2007, prior to the Great Recession. The good news is that Danish banks are solid and profitable.

Overall, business insolvencies are expected to increase for the second consecutive year in 2019 (+15%, and by +10% in 2020).

Significant current account surplus

The current account balance surplus for 2018 was 6% of GDP, down from almost 8% in 2017. The shrinking surplus was due to a much more acute deceleration in exports, which grew by 3.2pp less than 2017, coupled with resilient import growth. In the short-term, stockpiling in the UK due to prevailing uncertainty could help exports pick up, but the sluggish German manufacturing sector is also weighing down on Danish exports. The moderation in the current account surplus is also a result of a decrease in savings from 29.6% of GDP in 2017 to 28.5% in 2018, and a rise in total investment from 21.6% to 22.7%.

Authorities pay special attention to the housing market, given the excessive indebtedness of households and elevated house valuations

House prices continue to grow by 3% y/y on average, but growth has stabilized since a couple of quarters. Residential building starts have contracted for five quarters in a row and rebounded in Q1 (+13% y/y).

Several macro-prudential measures have been put in place by the authorities to avoid an overheating of the housing market. Household debt remains at excessive levels (above 270% of disposable income), the highest among the OECD countries. Two types of households appear particularly vulnerable: (i) those which purchased houses in overvalued urban areas when loan-to-income (LTI) ratios and credit growth were higher than in the rest of the country; (ii) low-income households who spent a significant share of their income on housing. A large share of mortgages are at variable rates, which increases the vulnerability of very indebted households.

Land tax-reforms started in 2017 to better match actual real estate values with the tax burden. Moreover, effective 2018, the government put restrictions on the floating-rate mortgages issued for highly indebted households (if DTI> 400% or LTV>60%). In addition, they educed the LTV limit to protect highly indebted low-income households and started the removal of tax deductibility on the interests paid on mortgages to correct for borrowing incentive distortions in the housing market.  Such measures are in line with the deceleration in housing price growth rates. However, Denmark’s rent controls remain among the highest within the advanced countries. 

Trade structure by destination/origin

(% of total)

Exports Rank Imports
Germany 15%
1
23% Germany
Miscellaneous 14%
2
13% Sweden
Sweden 11%
3
8% Netherlands
United States 7%
4
6% China
United Kingdom 6%
5
5% Norway

Trade structure by product

(% of total)

Exports Rank Imports
Pharmaceuticals 15%
1
5% Cars And Cycles
Meat 5%
2
5% Pharmaceuticals
Electrical Equipment 5%
3
4% Plastic Articles
Engines 4%
4
4% Refined Petroleum Products
Fats 3%
5
3% Electrical Apparatus

Payments take 7 to 30 days on average, but delays of approximately 12 days may be expected. The EU legal framework provides reliable tools when it comes to late payment matters.​

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

Courts are reliable and the system provides fast-track proceedings for undisputed claims below DKK 100,000. Delays and costs otherwise remain significant when a claim is disputed, and EU standard proceedings are not fully applicable in the country.

Although domestic insolvency law aims at rescuing companies to increase the chance of recovering debts, it provides no limitations as to how much of the debt may be written off in restructuration negotiations and it is rare for unsecured creditors to recover from insolvent debtors in practice.

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Collection Complexity Denmark

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