Economic Fact Book: Denmark

Denmark is the 18th richest country in the world measured by GDP per capita
(purchasing power parity-based) in 2010. During the financial crisis in 2008/09, the Danish economy was hit hard. Uncertainty led to increasing savings and declining private consumption and the international crisis forced Danish exports down to a level that had not been seen since the beginning of 2005. 

Since then,  exports have been the driving force behind economic growth. This was mostly due to the rapid recovery in Denmark’s largest export markets – Germany and Sweden – but now a new crisis has hit the global economy and growth has slowed down once again. A series of events – the earthquake/tsunami in Japan, elevated commodity prices, and latest the European debt crisis and the turmoil in the financial markets – has resulted in a slowdown in global economic activity and therefore exports are no longer enough to pull the Danish economy out of the crisis. On top of this, private consumption declined through 2011 with the exception of the final quarter when consumption increased slightly. Consumer confidence is still low and a weak housing market has caused consumers to hold on to their money. House prices fell throughout the second half of 2011 and are now 21% below the peak reached in May 2007. Hence, the housing market is under pressure due to economic turbulence and uncertainty and despite recordlow interest rates the savings rate remains high.

The unemployment rate is generally low in Denmark compared with the euro area. Even though unemployment has been stable for the past 18 months or so, employment is decreasing, putting the labour market under pressure. How to create new jobs and get people to work additional hours are some of the most discussed issues in Denmark at the moment. 

The outlook is for an expansionary fiscal policy in 2012 via several channels. First of all, a reform of the early retirement system is to be implemented in the first half of the year. This means that Danes can get their early retirement pension scheme contributions paid out. This is expected to increase private consumption by 0.9% in 2012. In addition, public consumption looks set to increase by around 0.6% in 2012, which is somewhat more than had been the case in 2010 and 2011. Finally, public investment should also provide stimulus. However, this expansionary fiscal policy has not been financed, so a significant budget deficit can be expected. This means that economic policy will have to
be tightened in 2013. Growth looks set to be low in 2013 due to the probability of a lengthy growth crisis in the western economies and fiscal tightening in Denmark.