The person of most importance in all this is your daughter. You are trying to decide whether his parents are a positive or negative to her life. And you must consider both the short and the long term.
Short term, it's positive because "DD enjoys their company and they love seeing her." Long term is where it gets tricky.
They are lying to her. They tell her that they don't know where her daddy is. They only get away with that because you don't tell her the truth. That is not a criticism of you - they've put you in this position.
Trouble is, truth will out. How can it not come out - at some point he'll resurface. She won't be five forever, and she will realise that she has been lied to. How will she feel about that, and who will she blame? She'll blame her grandparents for lying. Will she blame her mother for letting them lie, for not telling her the truth? Because her mother knew they were lying and said nothing. And then she'd truly have no-one
.
And she'll ask herself why they lied. And she'll deduce that they lied because their son was more important to them than their granddaughter. And she'll be devastated that people she trusted, that her mum let her trust, have been untrustworthy all along. She'll question if she can actually trust her mum, who colluded in the lie.
It is the continuation of the lie, and why they are lying, that will do the damage to your daughter.
So in my opinion the best thing long-term for your daughter is for the lying to stop. If his parents would be honest with your daughter, she could have a relationship with them that would not be ultimately damaging to her.
I wonder if they think their lie protects your daughter in some way? They see 'we don't know where he is' as less troubling to her than 'he's selfish and doesn't care about you'? It certainly makes life easier for them to just say 'we don't know'. No follow-up questions to field. It is ultimately a selfish non-answer on their part though, even if they pretend to themselves that it's a protective white lie to a five-year old.
But being honest with your daughter would only be the first step they'd have to take, and I'm not sure they're capable of the second and third steps. Prioritising her welfare over their son's; which would really involve them cutting him from their lives. They won't do that. If they'll do what they're doing now, they won't do that.
You need to lay it out to them. Point out the damage their lie is causing, and the pain it will cause your daughter when truth outs, and be clear that you are not going to allow that. They need to make their decision - son, or granddaughter. Who do they stand with?
Sometimes, what we have to do to protect our children bloody sucks, but we still have to do it. They and their son have brought about this horrible situation. And you are the one who is left dealing with it and trying to find the best, or maybe least worst, way to deal with it. In my opinion, ending the lies is least worst. Next least worst is not resuming contact with them.
So sorry you're having to deal with this Slidetotheleft. It sucks.