Stockholm (Ekonamik) – Despite being in good shape, the Danish economy is threatened on two fronts by Brexit and the U.S.-China trade war, as the October 31 deadline for the U.K.’s exit from the European Union approaches and the latter continues to flare. However, new trading opportunities may also emerge for Danish companies, experts say. A U.K. exit from the EU without a deal – as seems increasingly likely – is, however, a greater threat to the Danish economy than the trade war, according to a number of economists.
The OECD has estimated that the worst-case scenario could be a decline of well over one per cent in Danish GDP. “As a small and open economy with the U.K. as the fourth largest export destination (absorbing 7.8% of total exports in 2017), Denmark is particularly exposed to Brexit,” according to the OECD 2019 Survey for Denmark. “New analysis shows that… although the U.K. is a comparatively less important trade partner, a worst-case scenario could result in a similar decline in GDP as in the Netherlands because of a more vulnerable sectoral composition of Danish exports.”
“The results suggest that Danish exports to the U.K. would drop by 17%, resulting in a 1.3% decline in GDP in the medium term (if tariffs were to be governed by WTO most favoured nation rules, with non-tariff costs also rising), taken to be a period that allows adjustment of labour and some reallocation of capital across sectors, but not including longer-term structural effects. The agri-food, especially processed food, and machinery and equipment sectors account for more than half of the export reduction to the U.K.,” the report reads (pp. 20-21).
“By contrast, financial services would likely increase their overall exports as Denmark would capture demand from other EU countries as the U.K. reduces its exports. The impact on employment [however] would be particularly painful.”
In addition, the Confederation of Danish Industry pointed out in a recent analysis that there is currently a high level of uncertainty about the global economy among Danish businesses. Denmark has – so far – defied the decline in export markets (not least Germany), but Brexit and the US-China trade war are likely to have unpleasant consequences. “If exports cannot maintain their recovered market shares in recent quarters and we experience a tougher slowdown in the world economy, Danish GDP growth could be reduced to 1.1 per cent in 2019 and 1.2 per cent in 2020,” DI writes. “This means that Danish GDP by the end of 2020 will be lower by almost DKK 27 billion [with] almost 35,000 lost jobs in this forecast.”
However, according to Jens Hauch, chief economist and deputy director of Kraka, a think tank, “the effect will be that a recession will be more likely in the short term. Realistically, the long-term effect will hardly exceed one per cent of GDP. That may not sound like much, but it will actually be quite a serious setback for Denmark.” Mr Hauch’s more conservative estimate is a long-term decline in Danish GDP of almost 0.5%, if Britain crashes out of the EU without a deal, though he does consider the Hard Brexit scenario to be worse for the Danish economy than the trade war.
“After all, the trade war only affects Denmark indirectly through a potentially lower [global] demand for Danish goods,” he explained. “If the economies of China and the United States are weakened, it could also have a negative impact on Denmark and Europe. But the U.S.-China trade war may also have the positive side effect of increasing trade between Europe and China, and between Europe and the United States.”
Other analysts have pointed out that the combination of Brexit and the trade war could trigger a major economic downturn similar to that experienced by Denmark and the world in 2009-2010 following the financial crisis. But Mr Hauch does not see a combination of Hard Brexit and the trade war triggering a major economic meltdown in Denmark as a realistic threat.
“What happened in 2009-2010 was the biggest economic crisis we have had in recent times. Back then, Denmark pursued an irresponsible fiscal policy. Global financial sectors were poorly regulated, ran some very large risks and were too uncritical with their lending. Nor were Danish banks consolidated well enough. Today, the situation is different.” Mr Hauch points out that a British farewell to the EU without an agreement could also have a positive effect on Denmark if, for example, it means that Polish workers leave the UK and come to Denmark instead.
At the Danish Chamber of Commerce, CEO Brian Mikkelsen, a former Danish Minister of Finance and of Business and Economic Affairs, sees the selection of Boris Johnson as the U.K.’s Prime Minister as a bad omen, warning of the threat to Danish businesses. But CoC Head of Analysis Katrine Ellersgaard Nielsen also believes the Danish economy is in good shape, giving grounds for cautious optimism. “But it is clear some things happening outside Denmark that can have major consequences. But how big the consequences are, and when they will come, is very difficult to say, ”she said.
“The Danish economy is doing well at the moment. We are one of the richest countries in the world. We have high productivity. Unemployment is low. But [it is clear some things happening outside Denmark can have major consequences, and] we know that every boom is followed by a recession, and Brexit and a trade war could mean that we will have a recession sooner.”