During the first half of 2020, the Danish economy was hit by a historically large setback that, in terms of both scope and pace, was much more significant than during the financial crisis. However, the downturn is expected to be brief as economic activity started to recover already in late spring, in step with the lifting of measures implemented to contain the spread of the coronavirus.
Our baseline scenario assumes that Danish GDP will drop by 4.5% in 2020 as a result of the sharp setback in the first half of the year. But much of the ground lost during the spring should be regained in the autumn, which will contribute to providing a strong starting point for 2021, when GDP overall is expected to grow by around 3%. Towards the end of next year any remaining Covid-19 restrictions should have been lifted, which will pave the way for a pick-up in GDP of some 2.5% in 2022. Consequently, overall economic activity should be back at pre-crisis levels around mid-2022.
Compared with many other countries, the Danish economy has been able to weather the global crisis pretty well. This is mainly because the coronavirus spread in Denmark has been kept largely under control. That has made a fast reopening of the economy possible and most importantly contributed to putting a floor under domestic consumption. At the same time the large Danish pharmaceutical industry has helped underpin exports during a period of nosediving global demand.
Denmark: Macroeconomic indicators
|Real GDP, % y/y||2.4||2.3||-4.5||3.0||2.5|
|Consumer prices, % y/y||0.8||0.8||0.6||0.9||1.2|
|Unemployment rate, %||3.8||3.7||5.1||4.9||4.1|
|Current account balance, % of GDP||7.0||7.8||8.3||7.0||6.6|
|General gov. budget balance, % of GDP||0.5||3.8||-4.5||-2.6||-0.4|
|General gov. gross debt, % of GDP||33.9||33.3||45.0||43.5||42.0|
|Monetary policy rate, deposit (end of period)||-0.65||-0.75||-0.60||-0.60||-0.60|
|USD/DKK (end of period)||6.53||6.66||6.33||5.92||5.74|
Forecast fraught with uncertainty
The outlook for the Danish economy is currently fraught with much higher uncertainty than normal as both the extent of the crisis and its origin are without precedent. A key factor behind our forecast is how the spread of the virus evolves, as this is crucial for demand both in Denmark and in Denmark’s export markets. In our baseline scenario, we assume that a vaccine will be widely available during the first half of 2021, which will pave the way for a removal of the restrictions on economic activity.
If a vaccine becomes available before then, it could of course boost economic activity faster than assumed in our baseline scenario and pave the way for a return to pre-crisis levels as early as in 2021. Conversely, a renewed major outbreak of the virus and a reintroduction of restrictions could delay the economic recovery significantly. In this scenario, there is an increased risk that more fundamental economic structures falter.
Strong household consumption
In Denmark, private consumption was supported during the crisis by a relatively limited spread of the virus, which has also made it possible to reopen the economy quickly. At the same time, Danish households have benefited from a surprisingly strong trend in the housing market, which has contributed to a relatively strong spike in retail sales from the lows seen in the spring. We see the same trend in domestic card spending among Nordea’s customers. It has increased steadily since the sharp decline in March caused by the lockdown.
To support household consumption, a broad majority of the Danish parliament passed a recovery package in June. For Danish households the package contains two key elements. First, persons who received social benefits (e.g. unemployment benefits, student grants or state pension) in April will receive a tax-free one-off payment of DKK 1,000. Second, the package makes it possible for wage-earners to have frozen holiday pay earned from the beginning of September 2019 to end-March 2020 paid out. This corresponds to up to three weeks’ holiday pay. If all wage-earners opt to have their holiday pay paid out, Danish households will receive close to DKK 40bn no later than in October. This amount corresponds to nearly 4% of annual household consumption. The degree to which this payout will be channelled into increased spending depends a lot on how many wage-earners opt to take advantage of this opportunity and how consumer confidence develops in the coming months prior to the payout.
In addition to the payouts under the recovery package, around 800,000 homeowners will receive a refund of overpaid property tax totalling some DKK 13bn as a result of the new property assessments. Coupled with lower property value taxes until the new property tax rules are finally implemented in 2024, this will provide an additional boost to households’ purchasing power and pave the way for a solid uptrend in household consumption in the coming years.
The Danish economy is back on the growth track, but activity will not be fully back at pre-crisis levels until mid-2022.
Jan Størup Nielsen, Nordea Chief Analyst
Exports hit hard
The value of total Danish exports declined in H1 2020 by some 7% compared with the year-earlier period. Especially exports of services dropped, while export of goods held up slightly better, mainly thanks to record-high sales of pharmaceutical products.
During the coronavirus crisis, the order intake of industrial companies from export markets has declined to the lowest level since the financial crisis. This will cast long shadows over the sector in the remainder of 2020. However, recent indicators suggest that the industrial companies have become more optimistic lately about the expected order intake from export markets. Coupled with expectations of a relatively sharp recovery of key export markets, this could point to a marked increase in exports next year.
When the aid packages expire
Since the outbreak of the coronavirus in March the Danish state coffers have been wide open in order to alleviate the worst consequences of the many restrictions implemented to contain the virus. For example, businesses hit by the restrictions can apply for compensation for wage and fixed costs. Also, they can postpone paying income tax withheld at source and VAT to the government.
The huge aid packages and declining tax revenues have left a massive hole in the state coffers, and the 2020 deficit is likely to be the biggest deficit since the early 1980s. In coming years, public expenditure is also expected to be affected by the repercussions of the crisis, but as economic activity is forecast to rise relatively quickly over the same period, it will probably not lead to a further increase in the government debt ratio.
In step with the reopening of the economy, most aid packages are now being phased out. Most importantly, the expiry of the wage compensation scheme on 29 August will likely prompt an increase in unemployment during the remainder of the year. We expect gross unemployment to peak at some 170,000 full-time unemployed, corresponding to 6% of the labour force.
In light of the rising unemployment and as many businesses have less scope to pass on higher costs to customers, wage growth will likely remain under downward pressure in the coming years. But as only a very small increase in consumer prices is expected, households’ purchasing power should continue to grow over the same period.
Surprisingly strong housing market
So far, the Danish housing market has emerged from the crisis in far better shape than expected. The number of houses sold since mid-spring has been higher than in previous years, and this has contributed to lifting selling prices. The positive trend in the housing market has been underpinned by declining financing costs, which have brought households’ total interest expenses to a historically low level. At the same time, an increasing number of homeowners have taken advantage of the decline in long yields to refinance into fixed-rate loans. Consequently, for the first time in more than ten years, these loans now account for more than half of the total loan volume.
Our new forecast assumes that housing prices will decline slightly towards year-end in step with an increase in the amount of homes on the market. The drop in prices is expected to be driven by the usual seasonal fluctuations, a pent-up need among sellers and the rising number of unemployed. Still, average housing prices overall are expected to be 1.2% higher in 2020 than in 2019 – which is remarkable as the Danish economy this year has seen the biggest decline in GDP in recent times. We expect housing prices to rise again in 2021 supported by the anticipated pick-up in employment. But the upside potential will be limited by expectations of rising mortgage rates especially towards the end of our forecast period.
Jan Størup Nielsen, Nordea Chief Analyst
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