Denmark: Strong anti-coronavirus measures, recession likely

The Danish government has announced a series of measures to dampen the spread of the coronavirus. Among them are the following.

• All non-critical public employees are sent home with pay.
• All private employers are asked to keep employees home if possible.
• Schools, universities, day care etc. are closed.
• The government asks that events with more than 100 people be cancelled and that bars, nightclubs etc. are closed – within a few days, they expect to have the legal mandate to demand it.

These measures are in place for two weeks, but may be extended.

The background is that Denmark has seen a sharp increase in the number of infected persons in the past few days. There are now 514 confirmed cases, of which two are in critical condition, against 90 cases two days ago. The increase appears to be largely related to people who have travelled to Tyrol in Austria and authorities do not at this point suspect widespread domestic contagion. Nevertheless, the disease clearly poses a potential danger to the Danish healthcare system at this point.

We expect the economic impact to be very significant in the short run. Public service excluding healthcare represents 20.1% of employment and 15.7% of GDP. The decline in measured production will be smaller, as some can work from home and for example teaching might be done remotely. On the other hand, private production will be disrupted by workers staying home either to prevent contagion or to take care of children. There is set to be a large decline in GDP in Q1. It might not decline further in Q2 and hence a technical recession might not happen, but the setback will be so large that this is likely a recession in non-technical terms. For 2020 as a whole we expected 1.4% growth in our latest full forecast from 3 January. An estimate today might be something closer to 0.5%, with a clear risk that GDP will actually decline in 2020.

The new measures clearly represent a large supply shock to the Danish economy, but we also think that the economy is facing a significant demand shock from reduced spending not least on travel and leisure. The balance is likely to tip after 15 months of unchanged unemployment (including January), so we will see higher unemployment this year.

The new measures will clearly affect some businesses very severely and some, in tourism and travel for example, were already suffering. The government has announced a postponement of companies' payment of VAT and payroll taxes, which could boost liquidity and help companies survive. It is likely that more measures are coming, which could include support for credit to affected industries or a reduction of the countercyclical capital buffer. It would also make sense for the government to support demand through a fiscal easing, as the economy will not be supported from monetary policy, which is as always only targeting the exchange rate.

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