Country Economic Forecasts - Denmark

Country Economic Forecasts - Denmark

We expect the Danish economy to contract sharply in Q1 due to the extension of the national lockdown through February. The lockdown successfully reduced the number of cases and hospitalisations in January, but the threat of new coronavirus variants has forced the government to maintain restrictions, with the highly contagious UK variant rapidly becoming the dominant strain. The slow rollout of vaccinations within the EU will delay the easing of restrictions. In light of the extended lockdown, we have revised down our expected economic growth rate for 2021 to 0.6% from 1.9% previously. Activity should return to our previous baseline by H2 2021. Hard data for Q1 is not yet available, but initial survey evidence supports our expectation of a contraction in Q1 2021. The ESI declined in January, while the manufacturing PMI continued to contract in January. Retail sales recovered strongly in Q4 thanks to the disbursement of holiday pay, which will continue to boost consumption in Q1. But this likely reflects a partial shift in spending habits from services towards retail, with elevated savings still dragging on the recovery. We do think the economy is better placed to withstand the restrictions this time despite them being of a similar stringency to those imposed last spring. We still expect economic activity to recover strongly in H2 2021 as better weather and higher rates of inoculation help to control the pandemic, but the slow vaccine rollout will likely delay the relaxation of restrictions further into Q2, keeping activity depressed for longer. Even then, there are downside risks to the outlook as international travel restrictions will likely be the last to ease, making gains from this year’s tourism season uncertain.