Denmark's economy exhibited robust growth in late 2023, backed by strong pharmaceutical exports, despite subdued domestic demand due to higher interest rates and real wage losses.

The energy sector's focus on efficiency and renewable integration, coupled with a strong labor market, highlights the nation's resilience.

Economic policies are steering towards growth neutrality and inflation management, positioning Denmark for a stable economic trajectory in the face of global pressures.

Key Takeaways

1. Resilient Growth Amid Challenges: Despite subdued domestic demand and the impact of global economic pressures, Denmark's economy has shown resilience, with a robust real GDP growth rate of 2.6% in the last quarter of 2023, driven by strong net exports, especially in the pharmaceutical sector.
2. Energy Sector Dynamics: The Danish energy sector has adapted to global pressures with a 20% reduction in household energy consumption and ongoing investments in renewable energy, despite facing higher energy costs and price volatility, particularly due to global geopolitical tensions and the energy transition.
3. Labor and Industrial Strength: The Danish labor market remains strong, with nominal wage growth expected to support consumer spending into 2024, complemented by robust growth in the industrial sector, expected to continue its strength aided by easing inflation and potentially lower interest rates.
4. Policy and Economic Outlook: Denmark's economic policies are leaning towards neutrality with regards to growth, with a focus on managing inflation and leveraging fiscal policy to support monetary efforts in controlling inflation, while expecting a balance of payments surplus driven by international trade and energy production.
5. After slowing to 0.7% in 2023, economic growth is projected to recover to 1.4% in 2024. A strong labour market and large excess savings will support private consumption. By contrast, increasing borrowing costs and high uncertainty will weigh on housing and business investment.

Executive Summary

The Danish economy presents a multifaceted picture of resilience and challenges. Please read the latest economic outlook report by Behavio.one that provides a comprehensive analysis of Denmark's economic trajectory, highlighting the interplay between domestic demand, export performance, and the overarching influence of global economic pressures.

In 2023, Denmark's economy experienced subdued domestic demand, with higher interest rates dampening investment and real wage losses affecting private consumption. However, the nation's real GDP growth found support from strong net exports, particularly in the pharmaceutical sector, which benefited from robust international demand. This growth narrative, however, was tempered by a significant downward revision from the Autumn Forecast, primarily due to data revisions for the second and third quarters of the year (European Commission Economic Forecast for Denmark).

The 2023 Country Report on Denmark, prepared within the European Semester framework, underscores the country's economic and employment policy coordination. It delves into the recovery and resilience plan, further priorities ahead, and the alignment with sustainable development goals, providing a strategic overview of Denmark's economic landscape (European Commission Country Report - Denmark).

The Danish Data Center Industry's annual market report for 2024 emphasises the need for futureproofing Denmark's grid to harness the full potential of AI and digitalisation. It points to Denmark's attractiveness as a hub for data center investments, driven by high power security and ambitious renewable energy plans (Danish Data Center Market Report 2024).

Euromonitor's report on Denmark's economy, finance, and trade provides a granular view of the country's economic performance, with insights into the service sector's role in driving future growth and the impact of tighter monetary policies on economic activity (Euromonitor Economy, Finance and Trade: Denmark).

Danske Bank's Nordic Outlook for April 2023 paints a picture of an economy in uncharted territory, with modest growth outlooks and looming uncertainties. It highlights the diverging fortunes of Nordic economies, with Denmark showing relative outperformance ([Danske Bank Nordic Outlook April 2023]).

The OECD Economic Surveys of Denmark for 2024 provide a forward-looking assessment, noting the slowdown in growth and the need for reforms to address labor and skills shortages, as well as the challenges posed by an ageing population to the social model (OECD Economic Surveys: Denmark 2024).

Overview of Denmark's Economic Performance in 2023

GDP Growth and Economic Expansion

Denmark's economy experienced a robust expansion in the final quarter of 2023, with a GDP growth rate of 2.6% over the previous quarter, surpassing initial estimates of 2% growth (Trading Economics). This marked the strongest expansion since the second quarter of 2021, driven by industry, trade and transport, and utilities. The full year of 2023 saw the Danish economy grow by 1.9%, with a notable contribution from net external demand as exports rose by 7.5% in the fourth quarter, outpacing import growth.

Inflation Dynamics

The Danish inflation rate saw a significant drop in April 2023, with the annual consumer price growth rate falling to 5.3% from 6.7% in March, marking the most substantial monthly decline since at least 1981 (Bloomberg). This decrease was attributed to lower costs for electricity, gas, and food, indicating that inflationary pressures were easing more rapidly than anticipated.

Household and Government Debt

In 2023, Denmark's household debt stood at 208.0% of disposable income, while government debt was more moderate at 34.7% of GDP (OECD Data). These figures highlight the high level of private indebtedness relative to government debt, posing potential risks to financial stability and consumer spending.

Labor Market and Unemployment

The Danish labor market remained strong throughout 2023, supporting private consumption. However, the unemployment rate and its latest value were not specified in the provided data. The labor market's strength is a critical factor in the country's economic performance, influencing both consumer confidence and spending.

Energy Sector and Efficiency

Denmark's energy sector has been a focus of attention, especially in light of the energy crisis. Households reduced their consumption of gas, electricity, and district heating by around 20% in 2022 based on price signals, with consumption levels in 2023 remaining below historical averages (IEA Report). The government's efforts to promote energy savings, renewables deployment, and clean energy investment are expected to have long-term benefits for the economy.

Impact of Global Pressures and Energy Prices on the Danish Market

Global Energy Market Dynamics and Danish Energy Prices

The Danish market, like many others, has been significantly influenced by the fluctuations in global energy prices. In 2023, Denmark experienced higher energy costs, primarily due to the volatility of gas and electricity prices. This was a consequence of several factors, including geopolitical tensions, particularly the Russia-Ukraine conflict, and the global push for energy transition (Danmarks Nationalbank). The European Union's dependency on imported natural gas has led to increased energy prices in Denmark, as the primary energy sources are traded across European borders.

Energy Transition and the Danish Economy

Denmark's commitment to a green energy transition has implications for the stability and predictability of energy prices. The expansion of renewable energy sources, such as solar and wind, has led to more volatile electricity prices due to their dependency on weather conditions. This volatility is expected to grow as the share of renewable energy in the total electricity mix increases, making electricity supply less adjustable and stable (Energinet).

Inflationary Pressures from Energy Costs

The higher energy prices in 2022 have led to an increase in Danish consumer prices, with energy costs contributing approximately 4 percentage points to the total core inflation of 6.6% in Q4 2022. The indirect effects of higher energy prices on consumer prices have been faster and stronger than in the past, suggesting that large energy price shocks affect core inflation more than smaller shocks (Statistics Denmark).

Energy Prices and Monetary Policy

The volatility in energy prices poses challenges for monetary policy. Central banks, including Danmarks Nationalbank, must navigate these fluctuations while aiming to maintain price stability. Cold winters or reductions in natural gas supplies could lead to new periods of increasing gas and electricity prices, which in turn impact inflation and monetary policy decisions (Danmarks Nationalbank).

The Energy Trilemma and Danish Policy

Denmark's Economic Policies and Future Outlook

Fiscal Policy and Growth Projections

Denmark's fiscal policy has been considerably tightened in 2022 and 2023, more so than in the euro area. For 2024, the fiscal policy stance is projected to be neutral for growth, with the government budget surplus expected to be slightly lower than in 2023 (Danmarks Nationalbank). The one-year fiscal effects are determined at 0.0 percentage points, indicating a neutral impact on the Danish economy's capacity pressures.

Inflation and Monetary Policy

Inflationary pressures have been a significant concern, with core inflation remaining high despite easing energy prices. High wage growth is expected to prolong the period of high inflation, necessitating a tight economic policy to manage inflation (Danmarks Nationalbank). The Danish central bank's recommendations emphasise that fiscal policy should not counteract monetary policy efforts to bring down inflation.

Balance of Payments and International Trade

Denmark is expected to continue seeing large balance of payments surpluses, driven in part by strong growth in production abroad under Danish ownership. The reopening of the Thyra gas field and higher North Sea production are projected to contribute to a reversal from an energy trade deficit to a surplus (Danmarks Nationalbank).

Labor Market Dynamics

Nominal wage growth in Denmark has been outpacing inflation, which is expected to support workers' purchasing power and consumer spending. This trend is anticipated to continue into 2024, contributing to economic resilience and potentially bolstering overall economic performance (Fitch Solutions).

Industrial Sector and Economic Activity

The industrial sector in Denmark, including manufacturing, has shown robust growth, which is expected to maintain its strength in 2024. Decreasing inflationary pressures and a trend towards lower interest rates are likely to support industrial activity in the forthcoming months (Fitch Solutions).