IMF concludes Article IV consultation with Denmark highlighting economic resilience

IMF concludes Article IV consultation with Denmark highlighting economic resilience
Economics
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Ceda Ogada Secretary of the Fund and Director of the Secretary’s Department | International Monetary Fund

The International Monetary Fund (IMF) Executive Board has completed its Article IV Consultation with Denmark, endorsing the staff appraisal without a formal meeting. The IMF's assessment highlights that Denmark continues to experience strong growth, largely driven by pharmaceutical exports, although domestic demand remains sluggish. Inflation has stayed below 2 percent, and both public finances and external positions are robust.

The IMF projects that Denmark's output growth will moderate from 3.7 percent in 2024 to 3.0 percent in 2025 and further to 1.8 percent in 2026. While exports, including pharmaceuticals, are expected to slow down, the reopening of the Tyra natural gas and oil field is anticipated to provide a temporary boost in 2025.

The report emphasizes that external risks such as increased trade barriers and geoeconomic fragmentation dominate the outlook for Denmark. Despite these challenges, Denmark's institutions, economic structure, fiscal position, and educated workforce contribute to its resilience against external shocks.

Denmark's fiscal position is strong; however, higher defense spending could necessitate adjustments for long-term sustainability. The IMF suggests focusing on growth-friendly measures while maintaining fairness within the welfare state framework.

In terms of financial stability, systemic risks appear contained but require ongoing vigilance. Banks are well-capitalized with strong profitability and liquidity. To bolster financial system resilience further, authorities should scrutinize banks' credit risk provisioning practices under International Financial Reporting Standards 9 and enhance oversight of nonbank financial institutions (NBFIs).

The IMF also recommends tightening borrower-based measures due to vulnerabilities in the commercial real estate sector. Structural reforms should continue to support income levels and preserve fiscal space amidst geopolitical tensions and an aging population.

Efforts towards climate adaptation are seen as crucial for sustainable growth given Denmark's vulnerability to sea level rise and coastal erosion. The government is developing a National Climate Adaptation Plan focusing on coastal protection and urban flood management.

Overall projections indicate that unemployment will stabilize at around 3 percent from 2025 onwards with inflation close to 2 percent annually. Public debt is expected to decrease from 31.1 percent of GDP in 2024 to 28 percent by 2026.