OECD Economic Outlook, Volume 2024 Issue 1

Denmark

Economic growth is projected to remain robust at 2.3% in 2024 before slowing to 1.5% in 2025. Improving global trade will sustain non-pharmaceutical exports, while growth in the key pharmaceutical sector is set to moderate. Wage rises and ongoing disinflation will increase household purchasing power. Business investment will recover gradually as credit conditions improve and interest rates decrease. The main risks to the outlook relate to performance in the main exporting sectors and stronger than expected effects from rising labour costs on inflation and price competitiveness.

Policy rates are set to start easing in the latter half of 2024 in line with euro area monetary policy. The fiscal stance is mildly expansionary but appropriate given slow growth in the domestic economy. Addressing skills shortages can help mitigate labour market tightness and related inflationary pressures. Reforms are needed to remove financial barriers to work and facilitate international recruitment.

Economic growth has been strong, but domestic demand has been weak

GDP growth was strong in the final quarter of 2023 (2.6% q-o-q), mainly driven by the pharmaceutical sector and business services. Improved business sentiment and industrial production suggest other sectors have been recovering. Rising consumer confidence and weak inflation have sustained household spending. Headline and core inflation have dropped due to falling energy and food prices reaching 0.9% and 1.7% respectively in March. House prices have been recovering, and transactions in the main cities accelerated before the introduction of a new property tax system in January 2024. Employment has continued to rise, and register-based data suggest that unemployment has remained below its pre-pandemic level, despite a modest increase over the past year. Wage growth has strengthened since mid‑2023, broadly in line with signals from wage negotiations.

Denmark: Confidence and inflation indicators

1. Consumer price index excluding food and energy.

2. Corporations and organisations standardised index of average earnings.

Source: Eurostat, European Commission Business and consumer surveys; Statistics Denmark; and OECD Economic Outlook 115 database.

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Denmark: Demand, output and prices

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The current account surplus reached 12.6% of GDP at the end of 2023, boosted by soaring sales of anti‑obesity medicines in global markets. While demand is expected to keep increasing, constraints on expanding production capacity may temporarily curtail growth prospects in this sector and slow export growth. Rising freight rates following disruptions in the Red Sea will lift revenues from maritime transport, but oversupply of container vessels will increase competition and put downward pressure on prices from mid-2024. The reopening of the Tyra gas field is projected to raise exports by around 0.2% of GDP in 2024 at current gas prices.

Monetary and fiscal policies will support economic activity

Policy rates will gradually fall from 3.6% in mid-2024 to 2.1% at the end of 2025 in line with the peg to the euro and euro-area monetary policy. Monetary policy pass-through and easing of financial conditions will be gradual due to heightened impairment risks. The fiscal stance is projected to be mildly expansionary in 2024 and 2025. A normalisation of tax revenues from corporate income, which were exceptionally high over the past three years, and rising spending on defence will reduce the government surplus. Wage growth in the public sector following collective agreements in 2023 and 2024, the refund of overpaid housing taxes in 2024 and cuts in personal income tax starting from 2025 will support household purchasing power. Fiscal space will remain large with public debt projected to be 29% of GDP in 2025.

GDP growth will stabilise and inflation moderate

GDP growth is expected to reach 2.3% in 2024, before decelerating to 1.5% in 2025. Strong activity at the end 2023 provides a “carry-over” effect that will boost annual growth in 2024. Growth of pharmaceutical sales is projected to slow, but recovering foreign demand in other sectors will support exports and business investment. Employment will drop moderately as employers adjust to rising labour costs and past productivity losses. Excess savings, wage growth and fiscal measures will support private consumption and housing investment. Inflation is expected to increase temporarily as the negative contribution from energy prices wanes and labour costs translate into prices but should be around 2¼ per cent by the end of 2025. Risks to the projections include stronger activity in the pharmaceutical sector. With the labour market remaining tight, wage growth may exceed expectations, potentially leading to more lays off and a loss of price competitiveness, undermining the export recovery.

Addressing labour shortages to reduce risks and boost economic potential

Risks of persistently high inflation have receded, allowing for a gradual easing of monetary policy. The current fiscal stance is justified as domestic demand remains weak, but it should become more neutral if capacity pressures in the economy emerge. Policies contributing to reducing labour shortages can help to mitigate increases in wage costs. Further targeted cuts in labour income taxation would bolster work incentives and support labour supply. Relaxing migration policies and reducing the administrative burden for international recruitment can ease recruitment difficulties. Reducing gender gaps in STEM fields and modernising vocational education would help employers to find skills needed to adapt to the digital and green transitions. Public support to green investment should be prioritised to complement plans to strengthen carbon pricing, including in agriculture.