Russia's invasion of Ukraine means lower growth and higher inflation in Denmark

Authors Danmarks Nationalbank
Subject Press releases from Danmarks Nationalbank
Type Press Releases  
Year 2022
Published 16 March 2022
Abstract icon Danmarks Nationalbank assesses that the war will reduce GDP growth by approximately 1 percentage point and increase inflation by about 2 percentage points this year. In a new projection for the Danish economy, Danmarks Nationalbank concludes that, following gross domestic product growth of 4.1 per cent in 2021, GDP is expected to rise by 2.1 per cent this year and next year and by 1.7 per cent in 2024.

16 March 2022

Russia's invasion of Ukraine has great human costs, first and foremost for the citizens of Ukraine. The invasion will also have significant economic consequences for Denmark. This will primarily happen through higher price increases and increased uncertainty, which will affect consumption and investments globally and in Denmark.

"The human consequences of the invasion are unbearable, and my thoughts go to the Ukrainian people. If, in the midst of all this, we are to focus on the economy, the invasion and the sweeping sanctions imposed against Russia will have consequences for businesses and households. Danmarks Nationalbank assesses that the war will reduce GDP growth by approximately 1 percentage point and increase inflation by about 2 percentage points this year," says Governor Lars Rohde.

In a new projection for the Danish economy, Danmarks Nationalbank concludes that, following gross domestic product growth of 4.1 per cent in 2021, GDP is expected to rise by 2.1 per cent this year and next year and by 1.7 per cent in 2024. At the same time, consumer prices are expected to rise by 4.9 per cent in 2022, followed by 1.4 per cent and 2.2 per cent, respectively, in 2023 and 2024.

Russia's invasion comes at a time when the Danish economy had returned to a boom and when the unemployment rate was substantially lower than before the pandemic. At the same time, the Danes have accumulated large savings during the pandemic, and the economy as a whole has had a savings surplus of around 8 per cent of GDP in recent years.

"Healthy public and private savings balances and very low unemployment give the Danish economy a good starting point for coping with the economic consequences of Russia's invasion of Ukraine," says Lars Rohde.

In a short period of time, the invasion of Ukraine has sparked new fiscal priorities to strengthen the defence and reduce vulnerabilities in the energy supply. Denmark can afford this after decades of aiming to ensure healthy and sustainable public finances. Increased security of energy supply, i.a. with a focus on energy efficiency and renewable energy, will help to ensure Denmark a robust economy. However, the fiscal policy must be organised in regard to the economic situation and the capacity pressure in the economy.

"If increased expenditure on security of supply, green transition and defence leads to higher pressure on the capacity of the economy, there may be a need for fiscal policy to alleviate capacity pressure elsewhere in the economy," says Lars Rohde.

The sharp rises in the energy prices can create some pressure to mitigate the consequences for households with economic policy. Here, applying subsidies or reducing taxes is not a viable option, as they will further increase market prices and act as an income transfer to energy exporters at the expense of government finances in the importing countries. Instead, direct payments to particularly vulnerable households are an appropriate tool in the short term, as they aim to support consumption opportunities more broadly. However, this is not a permanent solution. A long-term sustainable solution, on the other hand, is to switch to cheaper forms of energy and improve energy efficiency.

Enquiries can be directed to press advisor Ole Mikkelsen on tel. +45 3363 6027.