Eco Perspectives

Denmark: the end of an impressive run?

12/15/2022

Up until now the Danish economy has continued to impress, with a strong post-Covid rebound which has propelled its GDP well above its pre-crisis level, but the future now looks a lot less bright. If inflation had not yet been able to fully undermine household purchasing power due to significant job creation and a level of over-saving which helped to mitigate the impact, these one-off shock absorbers are coming to an end and real household income is expected to fall over the coming quarters. The government is remaining relatively impassive in the face of this brutal shock and the fiscal response remains very limited, with public accounts that are in surplus and likely to remain so. Public debt should converge towards only 32% of GDP by 2024…

GDP GROWTH AND INFLATION

The impressive post-Covid growth in Danish GDP continued (+0.5% q/q) in the 3rd quarter of 2022 after +0.9% q/q in the 2nd quarter. GDP is now 6.4% above its level at the end of 2019. As has been the case since the post-Covid rebound, growth was buoyed by investment (+0.8% q/q), which was around 17% above its level at the end of 2019.

On the other hand, private consumption stalled in the 3rd quarter under the weight of an increase in consumer prices, which reached 10.1% in October over one year, although retail sales showed a degree of solidity in the consumption of goods at the beginning of the 4th quarter.

This resistance could surprise as the increase in nominal salaries (+4.9% year-on-year in Q3 2022) is much lower than inflation. Rather, the explanation lies with the labour market, which is particularly vigorous. In the 3rd quarter employment rose by 4.4% year-on-year, and the Danish unemployment rate stood at only 2.3% according to the International Labour Office definition (see Chart 2).

This level of job creation has therefore enabled purchasing power to be maintained on an aggregate basis, without having positive growth in real wages. The over-savings accumulated over the past two years have probably also helped to support consumption. Furthermore, the significant rise in energy prices does not seem to be affecting manufacturing production, which continues to perform remarkably well. Over the course of one year to September, Danish manufacturing production recorded a staggering growth rate of 23%. The specialisation of Danish industry in strategic sectors1 which are expanding strongly continues to be a winning strategy.

DENMARK: LABOUR MARKET

However, this strong momentum in the Danish economy is expected to stall in 2023. The labour market is expected to stabilise, and purchasing power will be eroded because of inflation. Exports are expected to weaken as global demand falls. And investment, particularly in construction, could fall with the rise in interest rates on home loans. For all these reasons, after a strong growth year in 2022 (+3%), the European Commission expects GDP in 2023 to be stagnant (+0%), followed by a gradual recovery in 2024 (+1.3%) (Chart 1).

Despite the decline in purchasing power, the Danish government is opting for less support for households and businesses, allowing it to keep the public finances in the black with an expected budget surplus of 1.8% of GDP in 2022. The government should continue to benefit from revenues that are higher than their expenditure in 2023 and 2024. This will result in rapid deleveraging, since public debt, which stood at 36.6% of GDP in 2021, should converge towards 32% of GDP by 2024.

Completed on 5 December 2022

Anthony Morlet-Lavidalie

1 We discussed this in the Q3 2022 EcoPerspective

THE EXPERT ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
Three "certainties", many uncertainties

Three "certainties", many uncertainties

From an economic perspective, 2022 will go down in history as the year in which elevated inflation made a surprising comeback forcing major central banks to start an aggressive tightening cycle [...]

Read the article
United States
United States: a recession lies ahead

United States: a recession lies ahead

US growth recovered significantly during Q3, but is expected to slow down during Q4 according to our forecasts. The labour market is still tight, but early signs of a slowdown are emerging [...]

Read the article
China
China: Yuan under pressure

China: Yuan under pressure

The depreciation of the yuan since the beginning of the year and portfolio investment outflows have been largely due to diverging trends in Chinese and US interest rates [...]

Read the article
Japan
Japan: on the hunt for growth

Japan: on the hunt for growth

Along with the United Kingdom, Japan has had the least vigorous recovery out of all of the G7 countries during the last two years. The country even recorded a 0 [...]

Read the article
Eurozone
Eurozone: will there be a growth outage this winter?

Eurozone: will there be a growth outage this winter?

It seems highly likely that for the eurozone, 2023 will bring an easing in inflation, a contraction in GDP and a peak in the ECB’s policy rates [...]

Read the article
Germany
Germany: how intense will the recession be?

Germany: how intense will the recession be?

Unexpected to say the least, +0.4% growth in German GDP in the third quarter should not distract from the bigger picture [...]

Read the article
France
France: year zero

France: year zero

The figure zero should define French growth in 2023 [...]

Read the article
Italy
Italy: a more uncertain scenario

Italy: a more uncertain scenario

During the summer, the Italian economy continued to show a strong resilience against increasing uncertainty. In Q3 2022, real GDP rose by 0.5% q/q, benefiting from the recovery of services, while both manufacturing and construction suffered [...]

Read the article
Spain
Spain: managing new risks

Spain: managing new risks

Spain is now the eurozone country with the lowest inflation rate, standing at 6.7% in November. Government measures to curb the rise in energy prices are paying off, although the underlying CPI is still rising significantly [...]

Read the article
Belgium
Belgium: cloudy sky

Belgium: cloudy sky

Belgian GDP avoided a dip in Q3, but our present forecast suggests Q4 could be worse. A short and shallow recession looks likely as record-shattering inflation is expected to gradually abate throughout 2023 [...]

Read the article
Austria
Austria: a slump on the horizon?

Austria: a slump on the horizon?

After dynamic business activity during the first six months of the year, Austrian growth slowed very dramatically during Q3 2022, due to the economic downturn both nationally and internationally [...]

Read the article
Greece
Greece: continuing positive momentum

Greece: continuing positive momentum

Despite the significant rise in inflationary pressures, the Greek economy continued to grow quickly during the first half of 2022, at a rate of 4.1% over the period. Nonetheless, real GDP fell back 0 [...]

Read the article
United Kingdom
United Kingdom: recession

United Kingdom: recession

UK growth contracted sharply in Q3, confirming that the economy has gone into recession. Household and business surveys confirm this fall in consumption and investment, which is likely to continue in the coming months [...]

Read the article