Denmark's banking system highly capitalized: IMF
On June 14, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Denmark and endorsed the staff appraisal without a meeting.
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 lower services' exports, but it remains high.
A comprehensive financial policy package-together with measures to support households and corporateshelped mitigate financial stability risks. Macrofinancial vulnerabilities stem largely from accelerating housing price growth amid high and increasing household leverage.
The near-term outlook is for a rebound in activity. This is predicated on the continued rollout and increased availability of the vaccine by the second half of the year.
With the expected lifting of restrictions, output growth is projected to rebound to 2.6 and 3.3 percent in 2021 and 2022 respectively. Activity will be supported by a recovery of private consumption and net exports.
The momentum in investment should strengthen in 2022 on the back of various initiatives that incentivize green investment and digitalization. The labor market will continue to improve, supporting wages. With the projected recovery, the negative output gap is estimated to close by 2022. Thanks to various initiatives to raise investment and labor supply, potential growth will pick up in the medium term, thus helping to limit scarring from the pandemic. In concluding the
Article IV consultation with Denmark,
Executive Directors endorsed the staff's appraisal as follows: Activity declined in 2020 driven by weak private consumption and net exports. But the contraction was milder than in peer countries, in part, thanks to unprecedented policy support that has cushioned the impact of the pandemic. The external position was stronger than the level consistent with medium-term fundamentals and desirable policies.
Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year.
A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report,
which forms the basis for discussion by the Executive Board. The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.
High and increasing household debt amid accelerating housing valuations remains a key vulnerability. Policies should support the recovery, safeguard the most vulnerable groups, enhance macrofinancial resilience, and facilitate green and digital transitions.
Denmark's public finances are sound with substantial fiscal space to support the recovery and facilitate the economy's green and digital transformations. Fiscal policy should prioritize COVID crisis support, facilitate reallocation, and support reforms for the economic transformation. 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 of neutral stance remains appropriate. The fixed exchange rate policy has served Denmark well. The policy provides a framework for low and stable inflation in Denmark.
The banking system is profitable, liquid, and highly capitalized, though in a challenging environment. Measures to support households and corporates mitigated liquidity and credit risks but impairments are likely to increase further once policy support is unwound.