Solid growth for the Danish economy

Expansion with ups and downs

The Danish economy has been through a turbulent period over the past two years. Quarterly data have moved up and down, and fluctuations have generally been larger than previously. A clear example is the trend in the last three months of 2023, when growth in total activities was measured at 2.6% relative to the previous three months. Excluding the large movements during the COVID-19 pandemic, the Danish economy has only grown at such a strong quarterly rate once before over the past 25 years. 

Disregarding these large movements, Danish GDP has risen by more than 10% over the past four years. By comparison, it took more than twice as long to generate similar growth in the years after the financial crisis. The trend in recent years in the Danish economy is even more remarkable given that several key export markets saw economic stagnation in the same period. 

We expect the Danish economy to continue to grow in the forecast period. This year, GDP growth of 2.5% is expected, which is slightly higher than last year (1.9%), but this is especially due to a very strong end to 2023, which created a strong starting level in 2024. In 2025, GDP growth is expected to abate to 1.5%. 

Seen relative to our forecast from January, we have significantly raised our expectations for this year.  However, this is especially due to large revisions of the historical GDP figures and the strong close to 2023, which statistically results in high growth this year, even if growth is not achieved on a quarterly basis. For 2025, growth expectations are slightly lower. 

3 / DENMARK: MACROECONOMIC INDICATORS, Baseline scenario

Consumer spending regains momentum

In 2022, consumer spending fell by 1.4%, primarily due to lower purchasing power, rising interest rates and an extraordinarily high spending level during the COVID-19 pandemic. During 2023, spending started to go up again, and households’ view on economic development has also become more positive – albeit still at a relatively low level. 

We expect consumer spending to rise further over the forecast horizon, mainly as a result of positive real wage growth. Wages in the private sector rose by more than 4%+ last year, which is the highest level in many years. Given the outcome of the collective bargaining rounds in both the public and the private sectors, the high wage growth is set to continue throughout 2024, ensuring a significant improvement in household purchasing power. 

In addition, the refund of overpaid housing taxes could boost consumption. Lastly, the Danish government adopted a new tax reform last year. According to the plan, it is to be phased in over the coming years and it includes an increase of the employment allowance, which could lift household spending further. 

Dual export trend

On the surface, Danish exports have steamed ahead over the past couple of years. In 2023, total exports grew by 13.4% – the highest annual growth registered in time series for the current national accounts data dating back to 1966. It is even more impressive that the large increase last year follows in the wake of a very strong 2022, when exports grew by 10.8%.

As noted earlier, a large part of the increase in exports can be attributed to the pharmaceutical industry. For other Danish goods exports, the situation is somewhat different. Since year-end 2021, world trade has stagnated, and many Danish export companies are also hampered by the strong DKK. The effect of this is reflected in industrial production trends, with industries outside the pharmaceutical industry experiencing a decline in production of around 10% since mid-2022. 

This year, we expect total Danish exports to grow in the realm of 7%, falling to around 3% in 2025. This implies expectations of continued growth in the pharmaceutical industry, but also that other industries will to an increasing degree benefit from higher activity in several key export markets. 

Sustained labour market tightness

The number of wage earners continues to grow in the Danish labour market, driven, in particular, by higher employment in the industry and service sectors, while employment in the construction sector has stagnated since the spring of 2022. 

A very large share of new wage earners in the Danish labour market has foreign citizenship. In total, foreigners now constitute more than 13% of wage earners, which is a doubling relative to ten years ago. At the same time, unemployment has been maintained at a very low level – albeit slightly higher than the lowest level in the spring of 2022.  The influx of foreign labour has also led to a decline in vacancies by more than 25% since the peak in early 2022. Although the level is still somewhat higher than the historical average, much suggests that the labour market has become more balanced. 

Strong public finances

According to the preliminary statement, last year’s public budget surplus was DKK 87bn, or more than 3% of GDP.  This marked the sixth year running with a surplus, and Denmark has for several years been among the countries in the EU with the most solid public finances.

The surplus in the past two years is extraordinarily remarkable, as pension tax receipts in both 2022 and 2023 have been much lower than previously. However, in recent years, government revenues have been strengthened by a large increase in income tax receipts thanks to the strong employment growth. 

The large public budget surplus has also affected gross debt, which has fallen steadily in the past ten years. Debt has fallen even though the balance on the government's account with the central bank exceeded DKK 230bn as of the end of March. Net debt has thus fallen even faster, and overall, the public sector has financial net wealth of around DKK 700bn, corresponding to around 20% of GDP.

Contrasting housing market trends

Sale prices of single-family and terraced houses rose sharply from mid-2020 and over the next couple of years. Prices were driven by a combination of rising employment, low financing costs and fewer homes on the market. By mid-2022, prices started to fall, due to large rate hikes and higher inflation. Consequently, in 2023, average home prices fell by 2.7%, which was the first year with falling prices in more than a decade.

We expect home prices to rise slightly more than inflation over the coming year, as the effects of higher financing costs will continue to impact the housing market. The market will also need to absorb a larger supply of homes for sale, which is normalising after a few years with exceptionally low activity. On the other hand, the housing market will be supported by the property tax reform, which implies that about eight out of ten homeowners will pay lower housing taxes overall. Moreover, record-high employment and high wage increases will strongly underpin price formation. Accordingly, arrears and forced sales are still at very low levels. 

Sales of owner-occupied flats rose sharply during 2023, as new homeowners could in many cases obtain a tax discount before the introduction of the new tax system by year-end 2024. However, this has left a “hole” in the market, and preliminary data indeed suggest that prices of owner-occupied flats have declined slightly since the beginning of the year. For 2024, on average, we expect prices of owner-occupied flats to be largely unchanged compared with last year. 

Rate cuts moving closer

We expect the ECB will cut its policy rate for the first time in June followed by two additional cuts towards the end of the year.

The DKK has for some time traded at a very stable level against the EUR, and the Danish central bank has not needed to intervene in the FX market since early 2023.  The central bank will most likely track the ECB, so that the Danish policy rate will continue to be 0.4 percentage points lower than in the Euro area. The need for a lower interest rate in Denmark to defend the fixed exchange rate regime is due, among other reasons, to the very large current account surplus.

In such case, the central bank deposit rate will decline to 2.85% by year-end – it is currently 3.60%. Quarterly rate cuts are expected until the end of 2025.

This article first appeared in the Nordea Economic Outlook: Falling into place, published on 24 April 2024. Read more from the latest Nordea Economic Outlook.