Despite turbulent times: Danish economy remains strong

The summer holiday is approaching, and we can look back on a first half of 2026 that has been unpredictable in many ways. Who would have expected, for example, that FCK would end up in the relegation playoff, and that AGF would become Danish football champions? And who would have imagined that the USA and Israel would launch a new major war in the Middle East with dramatic consequences for the global economy?

Fortunately, the starting point was good. Massive investments in infrastructure, the defence industry and, not least, artificial intelligence had more than offset the headwinds from President Trump's aggressive tariff policy, and many forecasters were on the verge of upgrading their expectations for 2026 when the war in the Middle East broke out on February 28.

However, optimism took a hit as the war dragged on. The Strait of Hormuz, which normally serves as a transit route for a significant portion of the world's production of oil, natural gas, helium, aluminium, fertiliser, as well as sulphur and sulphuric acid, was subjected to an effective blockade from both sides of the conflict. This has hit global value chains hard, extended delivery times for many goods, and contributed to a marked increase in global inflation, which will continue for some time yet, despite the fact that the war in the Middle East now appears to be approaching its conclusion.

While the consequences for the real economy have been limited so far, inflation developments have raised great concern among politicians and central banks around the world. The energy crisis of 2022 is still fresh in memory. Therefore, interest rates are now being raised in many places. Last week, the ECB raised interest rates by 0.25 percentage points, a decision that was followed by Danmarks Nationalbank, whose primary task is to maintain the krone's fixed exchange rate against the euro.

Although interest rates are likely to rise further, there is no reason to be overly concerned about developments in the Danish economy, which is still exceptionally strong. In the first quarter, GDP rose by almost 2 percent. Although the pharmaceutical industry once again accounted for the majority of the growth, developments in a number of other economic indicators, such as employment, retail sales, the balance of payments, housing prices and inflation - which is still much lower than wage growth - suggest that the second quarter may also turn out quite well. Therefore, a moderate increase in interest rates can almost only be welcomed. It reduces the risk of the economy overheating and can take the edge off the very sharp price increases we have experienced, especially in the Copenhagen and Aarhus housing markets in recent years.

The Mette Frederiksen III government is thus taking over a Danish economy in good shape, and the litmus test will be how financing is found for the many proposals presented in the record-long government platform.

Defence is already claiming a significant portion of the public expenditure framework towards 2035, as defence spending is to be increased to 5 percent of GDP annually. That the challenges are significant is evident from a close reading of the government platform. For no fewer than five of the fourteen main points around which the government builds its program, it is stated that "the government will continuously provide financing for the described initiatives."

Only time will tell whether this happens through withdrawals from the state's account at the National Bank, higher taxes and duties, increased debt or fiscal space. The latter cannot, of course, be ruled out, but it risks becoming more difficult than in recent years. This may be the case, for example, if the influx of foreign labour slows down, or if reform policy, which is meant to counteract the demographic headwinds in the labour market, is put on standby.

At the same time, it remains uncertain what significance the use of artificial intelligence will have for employment. Not because I fear mass unemployment, but rather because the technology may lead to significant shifts in the labour market. It is thus noteworthy that job growth has almost stalled in high-wage private sectors such as knowledge services and IT, media, and communication, while many jobs are still being created in the public sector and in traditional low-wage industries such as hotels and restaurants. If this development continues in the coming years, it will, all else being equal, increase the need for the proposals in the government platform to be financed through sources other than fiscal space.

And what will the second half of the year bring? Will new conflicts flare up? What will be the outcome of the American midterm elections? When will the Strait of Hormuz be made navigable again without any restrictions? And how many times will the ECB and the National Bank raise interest rates?

The questions are many and the uncertainty considerable. Fortunately, Denmark is entering the second half of the year from a strong starting point.

Have a great summer!