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IMF warns this oil-rich Nordic country of growth risks

The International Monetary Fund (IMF) has warned Denmark, a country sandwiched between prosperous nations Sweden and Germany and one with considerable natural resources like most of Scandinavia, that its economy is facing a number of risks to its growth outlook.

"Denmark has a longstanding track record of sound economic and social policies," the IMF said in an assessment of the Danish economy published on Wednesday. "Yet output growth has been weak for an extended period."

The IMF noted that gross domestic product (GDP) growth in Denmark has been below that of peers like Sweden and Germany for a longer time and this has continued in the aftermath of the global financial crisis.

Last week, the Danish Finance Ministry lowered its GDP growth forecasts to 1.1 percent this year and 1.7 percent next year, down from a December forecast of 1.9 percent and 2.0 percent, Reuters reported. The IMF predicted growth of 1.3 percent in 2016 and 1.6 percent in 2017, however.

Comparing Denmark with its nearest northern European neighbors, Germany, to the south, expects to grow 1.7 percent in 2016 while Sweden to the north of Denmark said last month that it expects growth of 3.8 percent this year.

A small boat near the iceberg detached from Jakobshavn (Sermeq Kujalleq) glacier, Ilulissat village, Qaasuitsup, west Greenland, Denmark.
DEA/M.Santini/DeAgostini/Getty Images
A small boat near the iceberg detached from Jakobshavn (Sermeq Kujalleq) glacier, Ilulissat village, Qaasuitsup, west Greenland, Denmark.

The IMF said the relative underperformance of Denmark partly reflected "slower growth of the working age population and a trend decline in the production of Danish North Sea oil and gas. But the persistent growth gap also reflects stubbornly low productivity growth which, over time, risks eroding the basis for living standards that today are among the highest in the world."

Denmark has considerable oil and gas wells in the North Sea and is among western Europe's largest oil and gas producers but a sharp drop in oil prices since mid-2014 has meant that it cannot rely on oil and gas revenues as much as it could before. Its other main exports are manufactured goods, food and agricultural products.

The IMF said that the "ongoing recovery is expected to remain gradual and muted" in Denmark and that private consumption continued to be the main driver of the economy, however, and that export growth was "likely to remain low, in line with the weak external environment."

What are the key risks?

The weaker global economic outlook was a particular worry for Denmark, according to the IMF which said that that "risks are tilted to the downside and could derail the recovery."

"In particular, lower-than-projected trading partner growth would adversely affect Denmark's outlook. Also, in view of high household debt and the sizable share of adjustable rate mortgages, volatility in global financial conditions leading to a spike in market interest rates could abruptly raise households' debt service and depress consumption."

House price rises in the country and especially Copenhagen drew another warning from the IMF that said "an unfettered continuation of recent rapid house price increases would raise the risk of a correction over the medium term."

It also noted that a forthcoming U.K. referendum on membership of the European Union and the potential for a vote to leave the bloc, a so-called "Brexit," could impact negatively on Denmark, which has a strong trading relationship with the U.K. "The expected disruption of trade and financial flows that would follow a potential "Brexit" compounds these risks."

The IMF called for economic policies to support the recovery, contain risks, and raise potential growth.

"Fiscal policy should be tuned to minimize risks to the recovery, while product market liberalization and better integration of refugees would help raise potential output. Enhancing the flexibility of housing supply and reducing adverse incentives from housing taxation, paired with readiness to implement appropriate and timely macroprudential measures, would reduce medium-term housing risks."

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