Spending drop pushes Denmark into surprise recession
Published 01/06/2011 | 05:00
DENMARK'S economy unexpectedly went into recession, new figures showed yesterday.
Denmark's economy contracted for a second quarter after consumers cut spending. Denmark now joins Portugal as the only European nations in a recession -- defined as two consecutive quarters of negative growth.
The Nordic country's gross domestic product shrank 0.5pc in the first quarter as the government and consumers cut spending amid a widening budget deficit. Economists had expected growth of 0.5pc in the first quarter.
"The figures are highly surprising," said Steen Bocian, an economist at Danske Bank, the country's largest bank.
"The reason for the lower consumption is a combination of higher taxes and higher inflation, driven by raw material prices."
Denmark went on a property-buying binge similar to Ireland's. This has led to high debts among the country's banks, consumers and businesses.
The smallest Scandinavian economy is also struggling with declining employment and widening deficits. Employment slid 0.1pc in the first quarter after declining 0.3pc in the fourth quarter.
Denmark's Finance Ministry said earlier in the week that the economy would expand by 1.7pc this year and by 1.9pc in 2012 as global trade rises. The government expects the budget deficit to widen to 4.1pc this year from 2.9pc in 2010.
"There are still considerable challenges," said Rasmus Gudum-Sessingoe, an economist at Handelsbanken Capital Markets in Copenhagen.
"There are threats in the short term from rising energy prices, a strong trade-weighted krone and signs that growth has reached a peak in our most important trading partners, Germany and Sweden."
House prices, which surged an annual 26pc in the second quarter of 2006, then slumped 28pc through the same period in 2009. Denmark's biggest mortgage lender said last month that house prices will also decline "slightly" this year and stagnate in 2012.
Danish banks took back 411 homes in April, up from 390 the month before. That compares with a monthly average of 103 foreclosures in 2006.
The country is also grappling with faster-than-average inflation, spurred by rising electricity and gasoline costs. The annual inflation rate rose to 2.9pc in April, the agency said last month. That compares with a 20-year average of 2.1pc.