OECD Economic Outlook, Volume 2025 Issue 1

Denmark

After a rebound to 3.7% in 2024, GDP growth is projected to moderate to 3.0% in 2025 and 1.5% in 2026. Rising household real disposable income will sustain consumption and housing investment. Export growth will be supported by the pharmaceutical sector and the reopening of gas fields but will nevertheless slow amid softer foreign demand. Business investment will lose momentum due to high uncertainty about the global trade outlook. Inflation is projected to decline from 1.9% in 2025 to 1.7% in 2026 as capacity pressures ease and wage growth moderates. Risks are to the downside, as further trade restrictions could hit key export sectors.

The central bank is projected to gradually lower policy rates, matching the expected easing of euro area rates. Fiscal policy is expected to be expansionary in 2025 and 2026, while maintaining fiscal space to respond to potential adverse economic shocks. Sustained public support to innovation and knowledge diffusion is needed to safeguard investment and competitiveness and facilitate the green and digital transitions amid rising uncertainty and risks.

GDP growth has become more balanced

GDP contracted by 0.5% in the first quarter of the year, mostly due to a fall in volatile pharmaceutical exports. Output recovered in non-pharmaceutical sectors and investment in building and construction rebounded. Available indicators suggest a softening of manufacturing activity in early 2025, with low demand identified by firms as the main production constraint. Labour market tightness remains elevated relative to historical norms but has eased. While household purchasing power has improved as employment and real wages have continued to grow; falling consumer confidence has restrained consumption appetite. Housing, energy and food prices have moderated; and headline and core inflation have fallen to around 1.5%. Wage growth has remained aligned with collective agreements and recent negotiations suggest it should slow to around 3.5% per year. House prices have recovered and now exceed their 2022 peak amid lower interest rates.

Denmark

Source: OECD Economic Outlook 117 database; and Danmarks Statistik.

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Denmark: Demand, output and prices

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Denmark’s direct exposure to recent changes in US tariffs is modest but the few large firms driving growth in recent years are deeply integrated in global value chains and serve the US market. The impact of tariffs on the pharmaceutical sector is limited, as pharmaceutical exports are currently exempt from tariffs and there is substantial production in the United States. The slowdown in international trade flows will affect the maritime transport sector, already challenged by supply overcapacity. The outlook for the wind energy industry has been clouded by increasing investment costs and changes in US energy policy. Denmark is also dependent on prospects for demand in the euro area.

Monetary and fiscal policies will be supportive

The Danish central bank will follow anticipated rate cuts by the European Central Bank as part of the currency peg arrangement. Lower interest rates will support demand for credit. Stronger than expected labour market outcomes and exceptional revenues from corporate and pension taxes have led to another upward revision of the government balance in 2024. Rising spending on defence with the “Acceleration Fund” in 2025 and 2026 (0.8% of GDP) and personal income tax cuts (0.2% of GDP by 2026) will contribute to reducing the budget surplus. The fiscal impulse is projected to be expansionary in 2025 and 2026, at over 2% of GDP, but additional spending on defence and falling tax revenues from firms operating abroad will have only a limited impact on the domestic economy.

Weaker trade and high uncertainty will weigh on GDP growth

GDP growth is projected to slow following the robust expansion since 2022. Exports will lose momentum due to slowing foreign demand, lowering the current account surplus. High uncertainty will weigh on business investment. Tensions on the labour market will ease and employment growth will stabilise. Private consumption will pick up gradually and housing investment will continue to recover, supported by real wage growth and tax reductions. After the rebound in early 2025 due to rising energy and food prices, headline inflation is expected to level off at 1.7% in 2026 in line with moderate labour cost growth and reduced capacity pressures. Economic prospects significantly rely on a few large firms, increasing the level of risks to the outlook. An introduction of tariffs on pharmaceuticals or transport services would further challenge key Danish firms. Stronger-than-expected growth in European main trading partners, following fiscal policy easing in Germany, could boost exports and help restore confidence.

Policies should adapt to uncertain economic developments

As fiscal space is large, with low public debt and a fiscal surplus, further fiscal policy easing could be envisaged if a further deterioration of the global trade outlook significantly hits the domestic economy. Efforts should concentrate on promoting productive investment for the green and digital transition. Reducing administrative burdens on firms, addressing skills shortages in strategic fields, including STEM, and streamlining processes to establish collaborations between businesses and universities would improve the business environment, stimulating investment and innovation capacities and maintaining high competitiveness. Clarifying government plans for the expansion of renewable energy and further accelerating network infrastructure developments would reduce uncertainty for investors in the energy sector.