Denmark 

 Denmark 
 
EFIC Country profile - map of Denmark

The economy is recovering from a deep recession, and the upturn is expected to be soft. After contracting by 0.9% in 2008 and 4.7% in 2009, the economy is expected to grow by 2% a year over 2010-2012 (Chart 1). Growth will be supported by higher exports – benefiting from a lower exchange rate and German economic recovery – plus higher private consumption. Fiscal consolidation, weak productivity growth and high levels of household debt will act as drags (Chart 5).

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Contact: Dougal Crawford, Senior Economist EFIC
dcrawford@efic.gov.au


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Key points

October 2010

  • The economy is recovering from a deep recession, and the upturn is expected to be soft. After contracting by 0.9% in 2008 and 4.7% in 2009, the economy is expected to grow by 2% a year over 2010-2012 (Chart 1). Growth will be supported by higher exports – benefiting from a lower exchange rate and German economic recovery – plus higher private consumption. Fiscal consolidation, weak productivity growth and high levels of household debt will act as drags (Chart 5).
  • Denmark's fiscal position is one of the strongest in the EU and its sovereign debt is rated AAA. In contrast, to many other debt-laden European countries, Denmark entered the crisis from a relatively comfortable position after a period of solid growth, large current account surpluses and relatively low public debt.
  • This does not mean that Denmark is immune from the troubles in the eurozone. It has a small open economy, with exports accounting for 50% of GDP. The majority go to the EU. As such, the economy is exposed to any flare-up in the eurozone sovereign debt-cum-banking crisis via its trade linkages.
  • The A$ is trading well above its normal trading band against the Danish krone. This reflects the fact that the krone is pegged to the euro which has been falling against the A$. The value of Australia’s exports to Denmark is around $170 million.
  • A minority centre-right coalition made up of the Liberal Party and the Conservative People's Party is in office. On both sides of politics the economic policy focus is fiscal consolidation. There are reportedly plans afoot by both the government and the opposition to wind back eligibility for unemployment insurance and disability pensions, partly for budgetary reasons, but also to encourage labour force participation and growth. The next election is due by November 2011. 

Denmark country profile - Chart 1

Denmark country profile - Chart 2Denmark country profile - Chart 3

Denmark country profile - Chart 4

Denmark country profile - Chart 5

Denmark country profile - Chart 6

Interpreting Chart 2

Business cycle risk. A volatile business cycle can be a special headache for exporters and investors, because it means that downturns will be steep – and corporate casualties will be high.

Currency risk. In today's world of widely floating exchange rates and sophisticated currency hedging techniques, some degree of currency volatility is quite acceptable, and presents little risk. But where a country has a weak balance of payments or is prone to wide swings in capital flows, it can suffer sudden and dramatic currency moves that can bankrupt large swathes of its corporate and banking sectors.

Currency inconvertibility risk. If the country suffers from a weak balance of payments, not only is it prone to steep currency depreciation, but there is a temptation for the government to impose exchange controls that prevent importers from converting local currency into foreign currency in order to make trade payments.

Systemic banking risk. Weak balance sheets and poor lending practices can sometimes trigger sector-wide banking crises.

Sovereign default risk. Fiscal mismanagement can put governments under financial strain to which they respond by running up arrears with, or defaulting on, overseas suppliers and creditors. With the sovereign cut off from credit, a sovereign default also increases the likelihood of sharp downswing in the economy, currency inconvertibility and a systemic banking crisis.

Difficulty/cost of enforcing contracts. If you get into a contractual dispute, will the country's legal and judicial system help or hinder you in pursuing a claim? Drawing upon World Bank data on the cost and time involved in enforcing contracts (at www.doingbusiness.org) we seek to measure the degree of help or hindrance.

The measure scale runs from negligible to extreme.

Chart 1 and 2

October 2010

Denmark country profile - Chart 1

Denmark country profile - Chart 2

Interpreting Chart 2

Business cycle risk. A volatile business cycle can be a special headache for exporters and investors, because it means that downturns will be steep – and corporate casualties will be high.

Currency risk. In today's world of widely floating exchange rates and sophisticated currency hedging techniques, some degree of currency volatility is quite acceptable, and presents little risk. But where a country has a weak balance of payments or is prone to wide swings in capital flows, it can suffer sudden and dramatic currency moves that can bankrupt large swathes of its corporate and banking sectors.

Currency inconvertibility risk. If the country suffers from a weak balance of payments, not only is it prone to steep currency depreciation, but there is a temptation for the government to impose exchange controls that prevent importers from converting local currency into foreign currency in order to make trade payments.

Systemic banking risk. Weak balance sheets and poor lending practices can sometimes trigger sector-wide banking crises.

Sovereign default risk. Fiscal mismanagement can put governments under financial strain to which they respond by running up arrears with, or defaulting on, overseas suppliers and creditors. With the sovereign cut off from credit, a sovereign default also increases the likelihood of sharp downswing in the economy, currency inconvertibility and a systemic banking crisis.

Difficulty/cost of enforcing contracts. If you get into a contractual dispute, will the country's legal and judicial system help or hinder you in pursuing a claim? Drawing upon World Bank data on the cost and time involved in enforcing contracts (at www.doingbusiness.org) we seek to measure the degree of help or hindrance.

The measure scale runs from negligible to extreme.

Chart 3 and 4

October 2010

Denmark country profile - Chart 3

Denmark country profile - Chart 4

Chart 5 and 6

October 2010

Denmark country profile - Chart 5

Denmark country profile - Chart 6

This report is published for general information and does not comprise advice or a recommendation of any kind. Readers should rely on their own enquiries in relation to matters discussed. While EFIC endeavours to ensure it is accurate and current at the time of publication, EFIC makes no representation or warranty as to its reliability, accuracy or completeness. To the maximum extent permitted by law, EFIC will not be liable to you or any other person for any direct or indirect loss or damage suffered or incurred by any person arising from any act or failure to act on the basis of information and/or the opinions contained in it.





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