Denmark Lowers Growth Forecasts for This Year, 2009

By Tasneem Brogger

Aug. 26 (Bloomberg) -- Denmark's government cut its forecast for expansion this year and next after its economy became the first in Europe to slip into a recession since the credit crisis started.

The economy will grow 1.1 percent on average this year and 0.5 percent in 2009, the Finance Ministry in Copenhagen said in a statement published on its Web site today. That compares with a May estimate for 2008 growth of 1.2 percent and 0.7 percent in 2009. The economy grew 1.7 percent in 2007.

Denmark fell into a recession in the first quarter after house-price declines and soaring food and energy costs undermined consumer demand. Since then, consumer confidence has slumped to an 18-year low, inflation is at an 18-year high and the central bank has had to bail out a commercial lender for the first time in 15 years after its loans to the property market failed.

``The government's painting a picture of an economy that's really stepping on the brakes,'' Steen Bocian, head of global economic research at Danske Bank A/S, said in a note to clients. ``It's not exactly an uplifting picture for the coming years.''

Growth is slowing as inflation accelerates. The government raised its estimate for inflation this year to 3.5 percent from previously 3.3 percent. Inflation will be 2.7 percent in 2009, compared with a May forecast for 2.6 percent.

The central bank can't use policy to stabilize prices or demand as its sole mandate is to keep the krone in a 2.25 percent band against the euro. The bank last raised the key lending rate on July 3, tracking the European Central Bank and bringing the rate to a seven-year high of 4.6 percent.

The government also raised its estimate for expenditure this year to 1.6 percent compared with previously 1.3 percent. It cut its estimate for spending next year to 1.1 percent from 1.2 percent earlier.

``The fiscal policy will help prod the economy forward a little,'' Niels Roenholt, an economist at Jyske Bank A/S, said in a note to clients.

The government plans to borrow 30.1 billion kroner ($5.9 billion) in 2009. That compares with no borrowing requirement this year and a financing need of 3.1 billion kroner in 2007.

The government's budget surplus will narrow to 3.6 percent of the economy this year from 4.8 percent in 2007. The surplus will shrink to 3 percent in 2009, the government estimates.

To contact the reporters on this story: Tasneem Brogger in Copenhagen at tbrogger@bloomberg.net;