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Saturday, April 13, 2024

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Denmark

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GDP: USD395.4bn (World ranking 40)
Population: 5.9mn (World ranking 113)
Form of state: Constitutional monarchy
Head of government: Mette Frederiksen (PM)
Next elections: 2026, Legislative

Strengths

  • Strong business environment
  • Healthy public finances
  • High institutional effectiveness
  • Highly skilled workforce

Weaknesses

  • Exposed housing market
  • Small and open economy
  • High tax burden
  • High amount of regulatory requirements

Economic overview

Solid fundamentals provide a path for growth

Denmark registered one of the smallest recessions in the EU in 2020 (-1.9% vs -6.3% for the EU) and reached pre-crisis levels of growth by Q3 2021. The low level of public debt (30% of GDP) allowed the government to unwind stimulus measured in a very progressive manner and reach nearly 5% GDP growth in 2022. Private consumption and fixed investment were the main drivers of growth. Growth will remain stable, with 1.2% in 2023, followed by a moderate pickup to 1.4% in 2024 and a further increase to 1.9% in 2025.The available fiscal space even enables the government to outline ambitious goals regarding green and digital investments.

Inflation has reached a 40-year high in 2022 with 7.7%, given the global supply shock and commodity prices, inflationary pressure eased throughout 2023. We expect inflation to converge towards the 2% target by the end of 2024. The labor market is expected to remain tight as the incoming flow of foreign workers has not yet recovered to pre-crisis levels. This should drive wage growth on the upside, albeit only temporarily as demand is expected to slow down and labor supply to grow.

Housing market cool down while fiscal policy remains conservative

The Danish economy exhibits few macroeconomic vulnerabilities. The country enjoys one of the largest current account surpluses in the EU (above 13% of GDP in 2022), thanks to a strong rebound in trade in goods (pharmaceutical, energy and food exports). The fiscal balance returned to a surplus in 2022, with public debt at 30% of GDP. The fiscal balance is expected to be more conservative in 2024, targeting a debt level of 28% and further reducing it to 27% in 2025. The only potential concern are the high mortgage debt levels in relation to GDP of Danish households. As higher interest rates tend to be linked to falling property prices (which have been tremendously high) and risks could reinforce each other. But corrections are already underway and the ratio of household debt to GDP fell to a low at 86% in 2022 from 104% in 2021. With monetary tightening – the policy rate of the Danish Central Bank stood at 3.75% in December 2023 – and financing costs increasingly high, housing prices should decelerate.

Favorable business environment

Denmark enjoys one of the best business environments in the world. This is based mainly due to the ease of trade across borders – best of all in this category – capacity to deal with construction permits and resolve insolvencies and its favorable fiscal environment. The country is also at the forefront of technological innovation and aims to lead the way for green investment policy.

The Danish political system is often praised for its transparency and efficiency. With one of the lowest degrees of corruption and a clear separation of powers, it is trusted by the population. The landscape is divided between the social democrats led by Mette Frederiksen, currently ruling in a bipartisan government with the Liberals and the Moderates and the center-right. With generous and transparent welfare programs, a dynamic economy and a harsh stance towards immigration, the right has almost no territory left to grapple with. The letter point could, however, prove sensitive as the discrimination experienced by minorities could stoke social unrest.

CEOWORLD magazine - Insights - Denmark