Denmark: Economy plunges at record rate in Q2
August 31, 2020
The economy plunged 6.9% in the second quarter in seasonally-adjusted quarter-on-quarter terms (Q1: -2.0% s.a qoq) as a result of the Covid-19 pandemic; the reading marked the steepest contraction since the start of the series in the early 1990s. Nevertheless, the economy performed better than the average for the Euro area (-12.1% s.a. qoq), likely due to less severe lockdown restrictions.
The contraction was broad-based: on the domestic front, private consumption dived 7.2% (Q1: -3.6% s.a qoq), hampered by containment measures and rising unemployment, with the services sector taking a particular hit. Moreover, government consumption fell 1.5%, albeit at a slower pace than in the previous quarter (Q1: -1.8% s.a qoq), also suffering from the effects of the shutdown. Lastly, investment sank 7.0% in Q2, significantly worsening from Q1’s 0.1% decline, amid the uncertain economic outlook.
On the external front, exports of goods and services plummeted 14.1% in Q2, a much sharper drop than Q1’s fall of 1.6%, following a decline in foreign trade due to lockdown measures abroad. Imports of goods and services dived 13.8% (Q1: -1.3% s.a qoq).
Annually, the economy shrank 8.2% in the second quarter in seasonally-adjusted terms (Q1: -0.2% yoy), also marking the lowest reading since the early 1990s.
Looking ahead, activity should start to recover in Q3, thanks to the reopening of borders in late June and easing of domestic measures. Nevertheless, risks to the outlook remain, amid heightened uncertainty regarding the evolution of the pandemic and the recovery of key trading partners, which is essential for the economy. Changes in production and in consumer spending patterns are now challenges to be addressed. Moreover, authorities are determined to support the economy if the recovery becomes weaker than expected.
Commenting on the outlook in their 25 August Swedbank Economic Outlook report, analysts noted:
“The data also suggests the recovery has started […] The government has, in addition to the acute rescue funds, introduced a stimulus package in 2020 and 2021 to support the recovery, including distribution of holiday allowances to households and green investments. We expect government net lending to be negative throughout the forecast horizon, leaving the government debt at 40% of GDP in 2022. As in Sweden, the compensation schemes to business have not yet been used as forecast; e.g. compensation of fixed costs seems to cost much less than the estimated Dkr 65 billion.”
Author: Marta Casanovas , Junior Economist