Dark clouds loom over the Danish economy in 2023
Despite resilient economic growth in 2022, driven by exports and private investment, the Danish economy is set for a moderate slowdown in 2023, due to durably high energy prices and inflation, combined with a decrease in private savings. The Russian invasion of Ukraine only had a limited direct impact on the Danish economy as Russia accounted for less than 1% of Denmark’s goods trade exports and a mere 2% of its imports. The Russian gas export cuts to Denmark also had only a minor direct effect as natural gas accounted for just 6% of the energy mix in 2021 (and can be replaced by other sources), compared with 48% for wind, 21% for bioenergy and 16% for coal. While the direct impact is limited, the indirect impact, caused by globally higher energy prices in the European market, is spreading to food and other goods prices owing to increased production and transportation costs. This pushed the yearly inflation rate in Denmark up to an average of around 7.7% in 2022, its highest level since 1982, when the second oil price shock hit Denmark. Consumer prices are expected to increase further throughout 2023, but at a slower pace than in 2022. Price pressures are eroding the purchasing power of private households. Furthermore, consumption growth should further weaken over the winter and spring months amid decreasing savings. Higher wage demands in 2023 are likely as the labour market remains strong with an unemployment rate that reached a 14-year low and job vacancies close to double their pre-pandemic level.
To stabilise inflation expectations and because the Danish Krone is pegged to the euro, Denmark’s central bank increased its key interest rate by 320 basis points in 2022 and first quarter of 2023 to 2.60% and is expected to follow the ECB for the remainder of the year. Rising interest rates will put an additional brake on private expenditure, notably housing investment, as the (mostly variable) mortgages rates already rose noticeably in the second semester of 2022. In general, private investment is expected to be limited in 2023 due to high inflation, as well as growing financial uncertainty. Support will come from state aid for households and companies to cope with higher energy prices. In addition, investments are planned under the EU Recovery Fund from which Denmark will receive €923 million for the 2021-2027 period for investments in the green and digital transitions. That said, the outlook for Denmark is better than for many other European countries as it specialises in niche markets, including food products (pork and cheese), pharmaceuticals and renewable energy technology, which are less sensitive to cyclical fluctuations.
Twin surpluses shrink slightly
In 2023, the public surplus is expected to decline as expenditure incurred as a result of the war in Ukraine (the influx of refugees and defence spending) and energy will weigh on the budget, meaning that the low public debt should only decrease by a narrow margin. The current account surplus reached a record high in 2022 on back of a massive increase in the trade in services surplus, which is probably due to high profit generated by maritime transportation. The current account surplus should shrink somewhat but still remain high on back of expected weaker demand for Danish goods and maritime services from Western European trade partners, combined with a minor normalisation in import prices.
The victorious centre-left bloc formed a new left-right coalition
In November 2022, general elections took place in Denmark after Prime Minister Mette Frederiksen called a snap election in early October in the wake of a scandal over the illegal decision to slaughter the country's entire mink population over fears of a new Covid-variant in 2020. Frederiksen’s Social Democratic Party won the election and gained 50 out of the 179 seats in Parliament, its best election result in 20 years, while the main opposition party Venstre (liberal-conservative) almost halved its seats to a current 23 seats. In a political landscape composed of 16 parties, parties are usually divided between a centre-left “red” and a centre-right “blue” bloc. Late in 2022, after dropping negotiations with traditional left-wing allies, Frederiksen’s Social Democrats formed a coalition with Liberals and Moderates (who won in their first election with 16 seats and became the second-largest party in Parliament) securing 89 seats out of 179 seats. The new government broke with the traditional Danish left-right divide for the first time in more than four decades and is the first majority coalition government in Denmark since 1993.
Inflation, climate change, healthcare, and immigration are the most critical issues for the Danes. The coalition has revealed its plan to make Denmark climate-neutral by 2045 and reduce carbon dioxide emissions on a national basis. Against the backdrop of war in Ukraine, the Danes voted on 1 June 2022 to join the European Union's defence and security common policy, ending their 30-year opt-out. The move means that Denmark will be able to take part in joint EU military operations and cooperate regarding the development and acquisition of military capabilities within the EU. The government is expected to remain in office until the next scheduled election in November 2026. Another snap election is possible, but very unlikely, given the Danish political system’s traditional stability as well as low support of the coalition parties in polls since the election.