IMF: Denmark successfully navigated the crises

Photo: IMF

Danish authorities decisively utilized Denmark’s large policy space built over time to successfully navigate the crisis and lay the ground for a strong recovery. These are the main findings in the  Concluding Statement of an official IMF  staff visit to Denmark as part of annual consultations. The concluding statement was published yesterday, 11 May: 

Denmark entered the pandemic on a strong economic footing. The authorities decisively utilized Denmark’s large policy space built over time to successfully navigate the crisis and lay the ground for a strong recovery.

With one of the smallest contractions in Europe, the decline in real GDP in 2020 was mainly driven by weak private consumption and net exports. The swift and sizable fiscal response cushioned the impact on activity. Fiscal policy continues to support the recovery and public debt is sustainable.

Unprecedented policy measures supported the labor market; thus, unemployment increased only slightly. The current account surplus declined, mainly due to deteriorating services’ exports. A comprehensive financial policy package—together with measures to support households and corporates helped mitigate financial stability risks.

Macrofinancial vulnerabilities stem largely from accelerating housing price growth amid high and increasing household leverage. Policies should support the recovery, facilitate the green and digital transitions, safeguard the most vulnerable groups, and enhance macrofinancial resilience.

Key Policy Recommendations:

  • Fiscal Policy. The fiscal framework should remain flexible given the uncertain outlook and provide a bridge to the economy of the future. If the recovery falters, Denmark should deploy its substantial fiscal space as needed. Once the recovery is fully entrenched, a plan to return to the medium-term objective remains appropriate.
  • Labor market. As the recovery gains momentum, policies should shift from exceptional support to continue strengthening “flexicurity” measures to facilitate efficient resource reallocation. Efforts to improve employment prospects for the young, the low-skilled, and the foreign-born should continue.
  • Macrofinancial. Targeted policies are required to address vulnerabilities due to high household leverage amid rapid housing price increases while supporting the extension of credit to facilitate the recovery. These include tightening macroprudential tools in coordination with balancing tax incentives, and improving housing supply. Efforts to further strengthen anti-money laundering and combating the financing of terrorism (AML/CFT) supervision should continue.
  • Green transformation. A strategy including enhanced carbon pricing, reinforced by fiscal incentives across different sectors would help Denmark attain its ambitious emissions goal. Incentives for green investment (Green Tax Reform Phase 1) and the planned increase in public investment are welcome. But given Denmark’s sizable climate-related investment needs, more needs to be done, including creating further incentives for the private sector to step up green investment.
  • See the concluding statement here.