National Bank of Denmark details output gap methodology and assesses current Danish output gap at 0.5%

The National Bank of Denmark has published an analysis setting out how it estimates and assesses the output gap as a measure of capacity pressure and, by extension, current inflationary pressure and input to its fiscal policy recommendations. The Bank’s official assessment is that the output gap is slightly positive and lower than several model-only estimates, with a mid-2025 estimate of 0.5%. The analysis defines the output gap as the difference between actual GDP and potential output, where potential output is the level that would prevail if prices and wages had fully adjusted to current conditions. Estimates are produced using three models (a production function approach, a trend-cycle model and an r* model), but the official output gap incorporates expert judgement to account for factors not captured by the models and to manage significant estimation uncertainty and real-time revisions. Recent downward adjustments relative to model results are attributed to models underestimating unusually large movements, including stronger labour supply and structural shifts such as increased production abroad, with the judgement supported by indicators including easing labour-market pressures and manufacturing capacity utilisation. The Bank also notes that rapid potential output growth has allowed strong GDP growth without a corresponding rise in capacity pressure, alongside a large increase in the estimated potential labour force since 2015, including a significant contribution from foreign labour.