GDP growth is projected to moderate from 2.8% in 2024 to 2.5% in 2025 and 1.7% in 2026. Output growth in the pharmaceutical sector will continue to sustain higher activity, albeit at a slower pace. Domestic demand will strengthen, supported by stronger household purchasing power, lower interest rates and a housing market recovery. Inflation will reach 2% in 2025 and 2026, as wage growth slows. Labour market tightness is projected to ease, but persistent skills shortages in key areas remain. Heightened geopolitical tensions and trade restrictions could curb activity in key sectors, including maritime transport and the pharmaceutical industry.

The central bank is expected to gradually reduce policy rates in line with the European Central Bank. The fiscal surplus will narrow in 2025 and 2026. While public debt is low, the government should follow its medium-term plans and avoid creating inflationary pressures in the economy. Any additional spending needs to be targeted at priority areas, including targeted cuts in effective labour income taxation and further education reform to address skills shortages.

Output growth has been mostly driven by the pharmaceutical sector in the first three quarters of 2024. However, improving indicators for business sentiment and industrial production in other export sectors suggest a broader based recovery is underway. Employment has broadly stabilised and, while remaining above pre-pandemic levels, the number of vacancies per unemployed and the share of firms reporting labour shortages as a production constraint have dropped. Wages have continued to catch up with past price increases in line with collective agreements. Inflation has increased to 1.6% in October due to rising electricity prices, while core inflation has reached 1.5% boosted by services inflation, notably rents. Despite recovering real wages and a strong labour market, household spending has remained muted, reflecting higher interest expenses and low confidence.

Geopolitical tensions, including disruptions in the Red Sea, have negatively affected maritime transport and contributed to GDP volatility this year. Output growth in this sector should improve modestly in 2025-26 in line with global trade growth. The pharmaceutical sector’s contribution to growth is projected to decline due to limitations in ramping up production capacity in the medium term. Growth in other export sectors should continue to recover as foreign demand improves and gas fields in the North Sea become fully operational.

The Danish central bank will follow the ECB’s decisions in line with the peg to the euro. The central bank policy rate will fall to 1.6% by end-2026. Financing costs are expected to remain relatively high, and the uptake of credit increase only gradually. From 2024 to 2026, the budget surplus will progressively decline due to a weaker labour market, rising spending on defence, green investment and local public services, as well as cuts in the personal income tax from 2025. The fiscal impulse should be mildly expansionary in 2025 and 2026 as additional spending on defence is expected to have a limited impact on the domestic economy.

GDP growth will slow from 2.8% in 2024 to 1.7% in 2026. A slowdown of export growth in the pharmaceutical and maritime transport sectors will only be partly compensated by stronger exports from other sectors. Excess savings accumulated in early 2024, real wage growth and tax cuts will sustain private consumption. Housing and business investment will recover on the back of monetary easing. Inflation will temporarily rebound from 1.4% in 2024 to 2% in 2025, as firms’ capacity to absorb rising labour costs has declined. Employment growth will slow, easing recruitment difficulties. Risks to the outlook primarily relate to the performance of key exporters, which is influenced by geopolitical developments. Weaker-than-expected demand from European countries could negatively impact the outlook of industrial sectors, such as machinery, and of business services. Firms may adjust employment or increase prices above projected levels to restore margins, which would dampen growth prospects.

Monetary and fiscal policies have eased, as inflation has reached pre-pandemic levels and inflation expectations remain well anchored. The economy is nearing full capacity and fiscal stimulus should remain limited. Chronic recruitment difficulties in areas exposed to the demographic, digital and green transitions need to be addressed. Reducing labour income taxation of low-paid workers and speeding up youth entry into the labour market by cutting very generous student allowances and targeting the voluntary tenth year in lower secondary education on students with the greatest learning needs can foster labour supply and help overcome labour shortages. Modernising the skills anticipation system would help adapt to a fast-evolving labour market. Expanding international science and technology programmes and encouraging girls’ engagement in these fields could also contribute to innovation diffusion and productivity growth.