Denmark: Large current account surplus is here to stay
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Denmark has been running significant current account surpluses over the past few years. However, the surplus has trended down recently and we expect it to edge down a bit further in the years to 2020.
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While the Danish recovery tends to narrow the current account surplus, the buildup of Danish net foreign wealth has the opposite effect.
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Denmark will probably continue to run substantial current account surpluses thanks to its large trade balance surpluses and net foreign capital income.
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A large current account surplus implies an underlying demand for Danish krone which will continue to contribute to a downward pressure on Danish interest rates going forward.
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The risks to our outlook come from global trading activity, which has been low in recent years and could be further depressed by any future US protectionist measures, as well as from developments in the return on investment in Denmark and abroad.
Denmark has been running a surplus on its current account almost continuously since 1990 and the surplus has grown to be very substantial over the past few years in historical terms and relative to peers. Since 2010, the current account surplus has exceeded DKK100bn annually, or 61/2-91/2% of GDP. While Denmark has maintained a large trade surplus for a long time, the surplus has widened in recent years and has been accompanied by considerable investment income as Denmark's net foreign wealth has grown and Danish investment abroad has yielded larger returns than foreign investment in Denmark.
The spread of workplace pensions since the beginning of the 1990s has gradually dampened consumer spending growth in Denmark, even though higher saving has been partly offset by growing household debt. This goes a long way towards explaining the significant current account surplus – and workplace pensions are set to continue growing for many years to come. However, in spite of the significant Danish savings abroad, the Danish current account surplus will probably not keep widening. On the contrary, the surplus as a percentage of GDP is likely to shrink a little in coming years.
Business cycle trends have supported a trade surplus
The spread of workplace pensions since the beginningPart of the surplus on Denmark's trade balance (the overall balance on goods and services) can be attributed to the current business cycle conditions. Domestic demand is modest in Denmark compared with our trade partners, which include, not least Germany and Sweden, and this is clearly reflected in the trade balance.
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