How the war could affect the Danish economy

On Tuesday, four of the country’s ministers – Nicolai Wammen (finance), Dan Jørgensen (climate, energy, and utilities), Simon Kollerup (enterprise), and Peter Hummelgaard (employment) – gave a joint press conference addressing the effect of the war on the Danish economy.  

Three scenarios regarding how it could turn out were presented. Wammen stressed that no matter which one happens, the war in Ukraine will affect the Danish economy and that it will be subject to great uncertainty.  

“The good news is that we are starting from a strong position. The bad news is that this will lead to higher inflation and lower growth,” he said. It will also have consequences for unemployment, he said.  

The price of freedom 
“Freedom and the struggle for peace and stability come with a price. And we in Denmark are willing to pay that price,” continue Wammen.  

However, unlike during the pandemic, Wammen warned that the government does not plan to compensate widely.

The hard scenario could see inflation reach the same level as in the 1980s.  Nevertheless, Wammen does not think it will be like during the oil crises in the 1970s. “The crisis is not going to pull the rug out from under the Danish economy,” he said.  

Heat package to be revisited 
Jørgensen said that the agreement on an ‘urgent financial handout’ for Danes particularly affected by high gas prices will be revisited. But he did not elaborate on what the government will come up with.  

He also explained that the ‘emergency’ heating assistance will be paid in August at the earliest: a lateness for which he apologised, but which cannot be changed.  

The hard scenario 
The starting point of this scenario would be if we put a complete stop to the use of Russian gas in Europe. This would mean that the already increasing prices would go even higher and that unemployment would rise.  

It is based on the risk of a further escalation of the conflict in Ukraine. If this is the case, GDP growth would fall by about 3 percentage points and inflation rise by about 3.5 percentage points.  

The GDP in 2022 is expected to be roughly unchanged compared to 2021. 

Businesses would be suffering too 
Jørgensen said that we are not currently in a situation where there is a shortage of gas. Nonetheless, it could end up that way – if Putin chooses to shut off the gas to Europe.  

“Russian gas covers about 25 percent of total consumption. We have a contingency plan ready to supply homes that depend on gas – hospitals, and others,” he said.  

“We will be able to activate emergency stocks and, in the worst case, ask companies to reduce or completely cut off their gas consumption.” 

The new crisis is nothing like the corona crisis and aid packages to companies were not approved. In fact, Kollerup said there are no short-term or temporary solutions to this. 

A good time for a green transition 
This new crisis calls for a ‘green response’, according to Jørgensen. To launch this green response, there are a few options that will be put into place.  

The first is connecting more Danes to district heating. The minister will meet with municipality association KL and a number of selected municipalities this week. He did not say which municipalities. 

The second plan is to help businesses – not with aid packages but rather with advice. They should go reconsider green transition plans and how to keep running without gas. Other topics that were mentioned were job preservation, cyber security, how to deal with the sanctions, and how to welcome the Ukrainians who come here and want a job. 

Rise in unemployment  
Hummelgaard noted that Denmark has set an employment record for the ninth month in a row. Unfortunately, the unemployment rate should rise again because of this new crisis.  

The minister praises employers for their goodwill so far, but stresses that the coming period will not be easy. “There will be Ukrainians who speak neither Danish nor English and who come here with war trauma,” he says.  

Also, the government has no plans to postpone working reforms, which is supposed to help businesses short of employees. Part of the agreement was a lower monetary limit for foreign workers for a temporary period of two years, but it does not look like the blue bloc supports this, so it is doubtful it will be passed. 

The other scenarios 
With the mild scenario – really the best-case scenario – a rapid deceleration of energy prices would take place, and sanctions against Russia would stay unchanged. Activity levels would remain lower in 2023 than previously expected. Growth is accordingly expected to be 2.2 percent in 2022. 

In the medium scenario, the Danish economy would be noticeably affected by lower growth in export markets and higher energy prices. GDP growth in 2022 would fall by about 1.25 percentage points and inflation rise by about 2.5 percentage points. In this scenario, the foreseen growth would be 1.6 percent this year. 

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