Following strong growth in 2022, economic activity is projected to decelerate in the first quarters of 2023 before gradually picking up pace again over the remainder of the forecast horizon. Growth is set to be supported by solid net exports and an improvement in private consumption as inflation pressures recede and households recover some losses in real disposable income. The labour market is likely to cool slightly in 2023 as employment is projected to decline and the unemployment rate to rise slightly. Denmark is forecast to maintain a sizeable government budget surplus over the forecast horizon.
| Indicators | 2022 | 2023 | 2024 |
|---|---|---|---|
| GDP growth (%, yoy) | 3,8 | 0,3 | 1,5 |
| Inflation (%, yoy) | 8,5 | 4,3 | 2,5 |
| Unemployment (%) | 4,5 | 5,0 | 5,1 |
| General government balance (% of GDP) | 3,3 | 2,3 | 1,3 |
| Gross public debt (% of GDP) | 30,1 | 30,1 | 28,8 |
| Current account balance (% of GDP) | 13,1 | 10,7 | 10,7 |
Economic expansion hit by high inflation
In 2022, Denmark’s real GDP grew by 3.8%, driven mainly by strong base effects from high growth during 2021, net exports and the build-up of inventories. Private consumption was negatively affected by the surge in consumer prices and falling real disposable household income. Consumption stabilised in late 2022 after inflation reached its peak. Construction investment grew in response to rising house prices and housing demand in early 2022, but momentum waned towards the end of the year. Higher interest rates, elevated energy costs and diminishing expectations of future demand weighed on equipment investment. For the whole of 2022, investment increased substantially thanks to the purchase of a patent in late 2022, which is also reflected in services imports. Net exports were the main contribution to growth in 2022, driven by strong exports from the pharmaceutical industry and maritime transport sector.
In 2023, following a weak expected beginning of the year, real GDP growth is expected to improve gradually. Private consumption is set to recover as inflation decelerates, consumer confidence improves and households start to recoup some of the losses in income thanks to wage increases negotiated at the beginning of the year. Investment is likely to remain subdued as house prices continue to fall and financial conditions tighten. The exceptional patent-driven increase in intangible investment in the last quarter of 2022 is expected to be fully reversed in early 2023. Net exports are still forecast to contribute positively to growth, driven by goods exports.
In 2024, the economy is expected to continue expanding. Consumption is set to keep increasing as households’ disposable incomes improve further. With the abolition of a public holiday, hours worked are expected to increase. Investment is projected to benefit from the expected pick-up in domestic and international demand while interest rates may peak soon. Net exports could provide a positive contribution to growth. The gradual reopening of the Tyra gas field is expected to contribute positively to net energy exports. Imports are projected to increase due to the improvement of households’ and businesses’ demand.
Overall, real GDP is forecast to grow by 0.3% in 2023 and 1.5% in 2024.
Turnaround in the labour market
In 2022, the labour market was very tight, with employment increasing strongly, while unemployment decreased. The start of 2023 brought signs that the labour market tightness is easing, with less businesses reporting labour shortages, a lower job vacancy rate, and an uptick in the unemployment rate since late 2022. The cooling down of the labour market is projected to be accompanied by an increase in the unemployment rate from 4.5% in 2022 to 5.0% in 2023 and 5.1% in 2024.
Strong imported inflation
Consumer prices have been on a strong upward path in 2022, when inflation reached 8.5%. Prices of imported goods, notably energy, raw materials and food were the main drivers of inflation. HICP inflation appears to have peaked in autumn 2022 and has gradually abated since. It is set to further decline over the forecast horizon. Energy inflation has dropped sharply and is forecast to turn negative as of mid-2023, contributing to a deceleration of headline inflation. In turn, core inflation is expected to grow faster than headline inflation both in 2023 and 2024 in line with negotiated wage increases and lagged adjustment of prices to higher costs. HICP inflation is forecast to fall to 4.3% in 2023 and 2.5% in 2024.
Government budget surplus set to continue
In 2022, the general government budget surplus remained high, at 3.3% of GDP. This was supported by stronger-than-expected revenues from business and personal income tax on the back of positive employment developments and healthy corporate earnings.
The general government budget surplus is expected to decline to 2.3% in 2023 and 1.3% in 2024. Revenue is projected to continue to grow in 2023 and 2024, reflecting the gradual improvement in economic conditions. However, growth in expenditure — particularly for the public sector wage bill — is expected to lead to a further reduction in the budget surplus. The net budgetary cost of the energy support measures is projected in the Commission 2023 spring forecast at 0.3% of GDP in 2023, compared with 0.1% in 2022. The Commission currently assumes full phasing out of energy support measures in 2024.
In 2022, the government debt-to-GDP ratio fell to 30.1%. The continued government surplus and denominator effects, countered by sizeable stock-flow adjustment items, are expected to bring the debt-to-GDP ratio slightly further down to 28.8% in 2024.