The Danish economy is expected to grow at close to its potential over the forecast horizon, driven by industrial production in combination with much higher North Sea energy extraction. The pharmaceutical sector is set to continue contributing significantly to the expansion in 2024 and beyond, with exports constituting a large part of demand. Employment is projected to fall marginally from present levels, implying a modest rise in the unemployment rate by 2025. Public finances are proving resilient, with continued sizeable, albeit declining, general government surpluses projected for both 2024 and 2025.
| Indicators | 2023 | 2024 | 2025 |
|---|---|---|---|
| GDP growth (%, yoy) | 1.9 | 2.6 | 1.4 |
| Inflation (%, yoy) | 3.4 | 2.0 | 1.9 |
| Unemployment (%) | 5.1 | 5.6 | 6.0 |
| General government balance (% of GDP) | 3.1 | 2.4 | 1.4 |
| Gross public debt (% of GDP) | 29.3 | 26.5 | 25.1 |
| Current account balance (% of GDP) | 10.9 | 11.7 | 11.3 |
Economic expansion driven by industrial production and exports
The Danish economy enjoys strong industrial production expansion, driven in large part by the pharmaceutical sector. Expansion in this sector was particularly strong in late 2023, implying that the economy entered 2024 with a strong carry-over supporting solid growth for the year as a whole. The positive growth outlook is set to continue in 2025, when lower interest rates and stable inflation are projected to underpin growth and employment. Overall, real GDP is forecast to grow by 2.6% in 2024 before easing to a rate of 1.4% in 2025.
Net exports are expected to again constitute a major growth driver in 2024. Growth in exports of goods is set to be underpinned by a further expansion of industrial, notably pharmaceutical, production and the reopening of gas extraction from the North Sea as from March 2024, making Denmark a net exporter of natural gas. Services exports in values should benefit from recent increases in sea freight rates. Imports are projected to grow modestly, in line with the expansion in domestic demand. Processing and merchanting are increasingly important elements in the foreign trade pattern and imply production outside Denmark' borders.
Private consumption is expected to contribute to the continued expansion of economic activity in 2024 and 2025 as high nominal wage increases and markedly lower inflation help households to recoup earlier real wage losses. A continued strong labour market, the repayment of overpaid housing tax for 2011-20 following new housing valuations and a forthcoming tax reform should also support consumption.
Business investments are set to remain subdued in 2024, held back by high interest rates and lower production capacity utilisation. However, investment is projected to gain momentum in 2025, in line with lower interest rates and renewed growth in some of Denmark’s main export markets. The expected pick-up in house prices is also set to support a rebound in housing investments.
The country-specific risks to the growth outlook are fairly balanced. The increased importance of the pharmaceutical sector makes the economy sensitive to potential major swings in production and demand in this sector. In addition, any large changes in sea freight rates, as witnessed over the past years, could significantly impact the foreign trade balance and the balance of payments.
Labour market bottlenecks easing
The economic expansion over the past years has brought employment to new record levels. Much of the increased demand for labour has been met by the influx of migrant workers and higher average retirement ages. The unemployment rate remains low but has been increasing slowly since mid-2022. High frequency data, including the job vacancy rate, indicate that bottlenecks are easing. The projected economic expansion in 2024 and 2025 is not expected to be as job intensive as the post-pandemic recovery. Collective wage bargaining in 2023, in combination with significantly lower inflation, is set to lead to the recuperation of lost real wage levels for households over the forecast horizon. In early-2025, new rounds of collective bargaining in the private sector are expected to result in slower wage growth. As employment falls slightly the unemployment rate is set to increase from 4.9% in 2023 to 5.6% in 2024 and 6.1% in 2025.
Inflation stabilising close to 2%
In early 2024, monthly HICP inflation rates stood below 1%, significantly lower than the euro area average, mainly due to the marked falls in energy prices. Danish inflation is expected to increase slightly throughout the year to post 2.0% in 2024, before stabilising at an annual average of 1.9% in 2025. Lower food prices are set to contribute to these low inflation rates, while services inflation could remain elevated, reflecting increases in wage costs.
Strong government finances
In 2023, the government recorded a surplus of 3.1% of GDP reflecting strong tax revenue as well as lower-than-expected government consumption below expected levels. Most measures to mitigate the impact of high energy prices were scaled back, as expected, by mid-2023.
More subdued economic activity outside the pharmaceutical and energy sectors in 2024 is expected to imply higher social transfers and slightly lower tax revenue. In addition, higher public consumption and investment, notably military expenditure, are projected to reduce the general government surplus, which is expected to fall to 2.4% of GDP. Tax revenue is expected to benefit from stronger pension yield tax revenue, reflecting lower interest rates. The net budgetary impact of energy-related measures is estimated at around 0.1% of GDP, down from 0.5% in 2023. Based on unchanged policies, the government surplus is forecast to fall to 1.4% in 2025, mostly driven by automatic stabilisers. Energy support measures are expected to remain close to 0.1% of GDP.
Government surpluses and significant denominator effects only partly countered by stock-flow effects are expected to bring the gross debt level to 26.5% of GDP in 2024 and to 25.1% in 2025.