IMF Executive Board Concludes 2019 Article IV Consultation with Denmark

On June 21, 2019, the Executive Board of the
International Monetary Fund (IMF) concluded the Article IV consultation

[1]

with
Denmark.



Denmark’s economic performance, based on a model that prizes social
inclusiveness, continues to impress with high living standards and
employment rates, along with low levels of income inequality. Growth
remained solid in 2018, supported by domestic demand, with the economy
operating above potential for an estimated third year in a row. The
labor market is strong, with pressures gradually building. Overall wage
growth has picked up, broadly in line with productivity. Inflation
remains moderate. The fiscal position is neutral and public debt is
sustainable. The current account surplus has declined, amid higher
investment and lower savings. House prices have started to soften, but
household debt remains high.

The outlook is for continued solid growth and gradually rising
inflation and wages. Output is projected to grow above trend in the
near-term, reaching 1.7 and 1.9 percent in 2019 and 2020 respectively.
Private consumption and investment are expected to be the key drivers
of growth, as financial conditions will stay accommodative and the
fiscal stance will remain broadly neutral for some time. Inflation and
wages are expected to gradually rise. Potential output growth is
projected to increase from 1.4 percent in 2016 to around 1.8 percent
over the medium term, a result of structural reforms and higher
investment. But risks around the outlook are tilted to the downside. A
sharper than expected slowdown in Denmark’s main trading partners could
slow export growth, as could a disorderly Brexit. High household debt
amid elevated house valuations remains a key source of macro-financial
vulnerability. The ongoing money laundering case could further affect
confidence in the financial sector and financial stability.

Executive Board Assessment

[2]

Executive Directors agreed with the thrust of the staff appraisal. They
commended the authorities for sound economic and social policies that
have delivered robust economic performance and high levels of social
inclusion. They note that while the outlook is for continued growth,
risks are tilted to the downside. In this context, they stressed the
importance of policies to raise potential growth and enhance
macro-financial resilience.

Given the substantial fiscal space in the medium term, Directors agreed
that the fiscal stance should remain neutral, while letting automatic
stabilizers operate fully in case of shocks to aggregate demand.
Additional temporary loosening could also be considered in the event of
a severe downturn, while remaining anchored to the medium-term
objective. Directors encouraged the authorities to pursue further
efficiency-improving reforms covering both revenues and expenditures,
noting this could be implemented in a fiscally-neutral way or designed
to provide stimulus if loosening is warranted.

Directors agreed that the fixed exchange rate policy has served Denmark
well. They stressed that monetary policy should remain focused on
maintaining the exchange rate peg.

Directors welcomed the overall soundness of the banking sector but
noted that there are pockets of vulnerabilities. To strengthen
financial resilience, Directors recommended a combination of micro- and
macroprudential tools to increase buffers, in addition to the counter
cyclical capital buffer, if risks continue to build up.

Directors commended the authorities for their recent efforts to
strengthen cross-border AML/CFT supervision. They encouraged the
authorities to continue to build on these efforts by adopting a
comprehensive institutional risk assessment model, increasing the depth
of AML/CFT inspections, and further expanding supervisors’ sanctioning
powers. They also saw scope to strengthen regional and international
cooperation.

Directors considered that high household leverage amid elevated house
valuations requires coordinated policy action. To reduce
vulnerabilities, they suggested enhancing the macroprudential toolbox,
including by increasing focus on income-based macroprudential
instruments. They encouraged the authorities to further reduce mortgage
interest deductibility and consider new policies to promote housing
supply.

Directors commended the strong labor market. They noted that increasing
benefits to low-income workers would help alleviate inactivity traps,
while reducing marginal tax rates for average income earners could
increase hours worked. Directors also saw merit in further measures to
incentivize the upgrading of technical and digital skills, close gender
gaps, integrate migrants, and attract skilled foreign labor.

Directors noted that productivity growth remains weak. They encouraged
the authorities to support broad-based innovation, improve the
institutional framework for competition, and foster the environment for
high-productivity sectors to expand. They also noted that addressing
the debt bias and improving access to equity finance for SMEs would
promote investment and help reduce the current account surplus.

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