Following strong growth in early 2022, economic activity is set to decelerate in the second half of the year and the beginning of 2023. This is driven by high energy prices, high inflation, falling real disposable income, higher interest rates and geopolitical uncertainty due to Russia’s war of aggression against Ukraine. While in 2023 the Danish economy is not expected to expand, in 2024 GDP is projected to see a return to growth amidst markedly lower inflationary pressures. Signs of labour market slack could appear in 2023 as employment is projected to decline and the unemployment rate rises slightly. Denmark enters the expected economic downturn with a large government budget surplus. This balance is set to remain positive over the forecast horizon.
Last update (forecast)
Last update (11/11/2022)
|GDP growth (%, yoy)||4,9||3,0||0,0||1,3|
|Inflation (%, yoy)||1,9||7,9||3,7||2,0|
|General government balance (% of GDP)||3,6||1,8||0,5||0,4|
|Gross public debt (% of GDP)||36,6||33,7||32,8||32,1|
|Current account balance (% of GDP)||9,0||6,7||7,4||7,8|
Economic expansion hit by high inflation
In the first half of 2022 Denmark saw positive economic growth, driven mainly by net exports and the build-up of inventories. Consumption was subdued, in part due to the surge in consumer prices and falling real disposable household income. However, the high level of accumulated savings in the past two years helped soften the impact of the 2022 losses in real disposable income. Construction investment grew in response to rising house prices and housing demand, while tighter financing conditions, higher energy costs and diminishing expectations of future demand weighed on equipment investment. Net exports are likely to contribute positively to growth this year, driven by exports of services, while growth in imports is subdued, reflecting weak domestic demand.
Growth is set to slow markedly in the second half of 2022, as private consumption weakens further and the previous build-up of stocks is partly reversed. The weaker economic growth outlook is expected to persist into 2023 as headwinds remain strong. With consumer prices expected to continue rising faster than incomes until mid-2023, private consumption is projected to remain weak. Investment — in particular in the construction sector — is likely to fall in the face of higher interest rates, expensive building materials and house prices levelling off. Growth rates of both exports and imports are expected to slow in 2023, reflecting falling demand, both domestically and in export markets. Net exports are thus projected to provide smaller positive growth contributions in 2023 and 2024.
Later in 2023 and especially in 2024, lower inflationary pressures as well as projected wage increases as a result of collective bargaining are expected to support households’ real disposable income and reinvigorate private consumption. Investment levels are projected to benefit from the expected pickup in domestic and international demand, and equipment investment in particular could turn positive again, albeit with modest growth rates.
Overall, real GDP is forecast to grow by 3.0% in 2022, before reaching a standstill (0.0%) in 2023 and returning to positive growth in 2024, at 1.3%.
Higher unemployment ahead
Denmark is entering the expected downturn with a very strong labour market. A range of sectors are reporting labour shortages and high employment levels. The unemployment rate is expected to fall in 2022, reaching 4.5% of the labour force before increasing to 5.5% in 2023 and 5.6% in 2024.
Strong imported inflation
Consumer prices have been on a strong upward path since 2021. Prices of imported goods, notably energy, raw materials and food are driving inflationary pressures. There are so far few, if any, signs of a domestically created wage-price spiral. HICP inflation is expected to peak in autumn 2022, followed by a gradual decline in inflationary pressures over the forecast horizon. Annual inflation is projected at 7.9% this year. Energy price inflation is forecast to turn negative from mid-2023 onwards, contributing to a deceleration of headline inflation to 3.7% in 2023 and 2.0% in 2024.
Government finances remain strong
In 2022, the general government budget surplus is expected to fall markedly to 1.8% of GDP, compared with the 3.6% of GDP budget surplus in 2021. On the one hand, this reflects falls in some revenue items, notably the pension yield tax. On the other hand, expenditure is increasing, notably government consumption. While revenue is projected to grow slightly in 2023 and 2024, growth in expenditure, particularly for the public sector wage bill, is expected to outpace that of revenue, leading to a further reduction in the budget surplus. Measures to mitigate the economic and social impact of high energy prices could amount to some 0.2% of GDP over the forecast horizon. Overall, prospects are for a budget surplus of 1.8% of GDP in 2022, 0.5% in 2023 and 0.4% in 2024.
In 2022 the government debt-to-GDP ratio is expected to fall to 33.7% while the continued surplus and denominator effects are expected to bring the debt-to-GDP ratio further down to 32.1% in 2024.