Five predictions about the Danish economy over the next few years

Unemployment is too low and will edge higher

Denmark's unemployment rate has so far stayed unexpectedly low, despite interest rate rises from the central bank, with the extreme labour shortages seen in 2022 still an issue for many sectors. 

"A big part of the explanation as to why the labour market is still so tight and still very strong is the fact that the service sector has done so well, because most people work in the service sector," Danske Bank economist Bjørn Sillemann told The Local. 

He sees this as a reaction to the pandemic, when people in Denmark were unable to buy services such as restaurant meals, hotel stays, or spa treatments and instead spent money on goods. 

"When the world normalised, there was a move in the opposite direction, and people who had spent on electronics and cars and stuff like that started to want to spend more on restaurants and travelling. Danes are still spending a lot of money on that, and that's also what keeps the wheels running in the labour market." 

But this is starting to change. The latest unemployment statistics from Statistics Denmark showed that the number of people registered as unemployed in the country increased by some 1,200 people in July, a sign that joblessness may be starting to creep up. 

"A big part of it can be explained by Ukrainians, but we expect that to move higher, because the unemployment rate is too low, and it's so low because the economy is overheated. It basically has to increase."

Growth is lower than it looks and will start to fall 

If you strip out the booming pharmaceuticals and service sectors, Denmark's economy was already struggling at the start of 2023. 

"The growth data that's come in this year has been better than expected, but it's largely driven by the pharmaceutical sector and a very strong service sector," Sillemann said. "A big part of industry, a big part of the manufacturing sector, is in recession." 

With Denmark's exporters heavily exposed to the European market, and to Germany's in particular, the more pronounced slowdown in these countries will soon begin to affect Denmark too, he added: "When the German manufacturing sector is doing poorly, that also reflects on Denmark."

The reason this hasn't happened already is that the shortages of labour and raw materials seen in 2022 left Danish manufacturers with long lists of unfulfilled orders that they are only now starting to get to the end of. 

“There were really packed order books and that picture has changed gradually over the recent year. The manufacturing sector is becoming more exposed as order books are becoming thinner.”

In its June outlook, Danske Bank expected GDP growth to slow to 1.5 percent in 2023 and to just 1 percent in 2024. 

When the fall in demand from customers in Europe and elsewhere starts to bite, Danish manufacturers will start to cut back on their workforces, causing unemployment to pick up. "Our expectation is that they will start to lay people off."

Denmark's economy will continue to be more resilient than neighbouring Sweden's

While Sweden's economy is also holding up better than expected, it's facing tougher times than Denmark and Sillemann expects this to continue, pointing to the greater exposure of Sweden's exporters to the business cycle, the greater exposure Swedish consumers have to interest rates, and the holiday money paid out to Danes. 

"That was actually a pretty big boost and you didn't see the same kind of same kind of boost in Sweden," he said of the holiday money, which saw the average employed Dane given 9,000 kroner at the start of 2021. 

A much greater share of Denmark's exports are from the pharmaceutical and food production sectors, which are more resilient to economic downturns. "People still need that medicine, even if there is a manufacturing recession," he continued. "The Swedish economy is more sensitive to the global business cycle." 

House and apartment prices are unlikely to keep rising 

After falling almost 8.5 percent from their peak in 2022 and the start of this year, house and apartment prices have started to stabilise and even grow slightly in recent months. 

"The housing market has definitely surprised on the upside and that reflects the fact that the economy in general has surprised to the upside," Sillemann said. "Turnover in in the housing market has come back, the interest in houses and apartments ha s started to increase, and it's almost back at normal levels again, and that's also then been reflected in prices, which have stopped declining and maybe even increased a little bit."

But he suspects that this gentle upward pressure on prices is likely to cease if buyers began to think that higher interest rates are here to stay. 

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"I think there's a pretty high probability that many consumers see the these higher interest rates as a transitory thing and still maybe need to adjust to the fact that high interest rates have come to stay for for for a longer period."

On the other hand, real incomes are also now starting to increase again, which will push towards higher house prices. "We don't expect to see further price declines, but so kind of a flattish development from here," Sillemann concluded.  

Inflation should start to fall properly next year 

Danske Bank believes that core inflation in Denmark "most likely peaked" at a little over 6.5 percent at the start of the year and will not rise any higher. 

"The question is, how fast will it come down? Because the risk, of course, is that if inflation is too high for for too long, then it it becomes difficult to get rid of because it starts to become embedded in people's expectations." 

Sillemann said that the hope was that Denmark and the rest of Europe would follow the same pattern as the US, where inflation has fallen steadily for a year and is now at just 3 percent. 

"There are some pretty nice signs that that inflation is coming down in the US. We're not seeing the same in the euro area yet. And also not in Denmark." 

But because the US has been a few months ahead of Europe in this cycle, both in experiencing its post-pandemic economic boom and resulting inflation and in hiking interest rates, the hope is that Europe and Denmark's economies will follow the same pattern.   

Until it actually does, though, there's still a risk of a hard landing

While Danske Bank's core scenario is that the economy will hold up, with inflation gradually falling during a long period of lower than structural growth, Sillemann believes that there is still a substantial risk of an unforeseen upset leading to a harder landing. 

"Our base case is that we get a sort of soft landing for the economy. We think that's the most likely scenario," he says. "What we've seen from the US is that central banks can actually meet their inflation targets without triggering a recession." 

But until that actually happens in Europe, there remains a risk. 

"That's the hope. But we're just not seeing the signs in Europe yet. As long as inflation is this far from the target, there's just no firm conclusion. The central banks' and the ECB's [European Central Bank's] mandate is to reach the inflation target, and they will have to hike interest rates or at least keep them at elevated levels until activity declines enough to trigger inflation to come down as well."

"So I think, if anything, the risk of a recession has kind of just been kicked down the road. It's still there. Because inflation hasn't really started to come down yet. There's still a significant risk that it will turn out worse, at least that's what history tells us often happens after interest rate increases." 

Denmark's next set of growth statistics are out on August 31st, and Danske Bank's new outlook for the Nordic and global economy will be published here on September 5th.