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Danish Economy Is Nordic Laggard as Twin Crises Stall Recovery

Denmark’s economy will struggle to emerge from its twin banking and housing crises as economic growth lags behind recovery rates in neighboring Sweden and Norway.

Gross domestic product will expand 1.1 percent next year, after growing 1.3 percent in 2011, the government-backed Economic Council said in a report today. Output next year may even contract as much as 0.5 percent if the government fails to galvanize consumer demand, the council said. The Finance Ministry, in a separate report today, sees GDP growing 1.1 percent in 2011 and 1.3 percent next year.

Denmark’s $325 billion economy is Scandinavia’s worst performing as the nation grapples with a regional banking crisis funding and housing slump. Most of the country’s banks have been cut off from funding markets, squeezing credit and stalling growth. Moody’s Investors Service said yesterday Denmark’s banking outlook remains negative amid sluggish economic prospects.

“International turmoil continues to damp the development,” the Finance Ministry said in a statement on its website. “Our exports had held up but are now also retreating; domestic consumption has ground to a halt.”

The government plans to bring forward as much as 17.5 billion kroner ($3.2 billion) in public investments in an effort to prop up growth. The budget deficit will widen to 5.1 percent of GDP next year from 3.8 percent in 2011, the government said.

Outlook Cut

Prime Minister Helle Thorning-Schmidt’s government, which took over from the Liberal-Conservative coalition of her predecessor Lars Loekke Rasmussen after September elections, cut a previous economic forecast for 1.3 percent this year and 1.8 percent in 2012.

In neighboring Norway, the non-oil economy will grow 2.8 percent this year and 3.1 percent in 2012, the government said on Oct. 6. In Sweden, output will expand 4.1 percent in 2011 and 1.3 percent in 2012, the Finance Ministry said Sept. 20.

The “crisis has shown just how important expectations and confidence are for economic development,” Hans Joergen Whitta- Jacobsen, the Copenhagen-based Economic Council’s chairman, said in a statement. “Fear alone of sovereign default and a new financial crisis has held back consumer demand and raised interest rates in countries with high debt.”

Twin Crises

The Nordic country is struggling to emerge from twin banking and housing crises that have depressed demand and threaten to stall any recovery.

Property prices will fall about 10 percent until 2013, bringing to 25 percent the aggregate decline in Denmark’s housing market since just before the crisis hit, the Economic Council said.

“The fall shows broadly how much house prices were overvalued during the boom years that led to the crisis,” the council said.

Fiscal stimulus is appropriate as long as it’s temporary and fully financed, the council said. The council also recommended an increase in property taxes, frozen since 2002, to reduce income inequality.

Unemployment will rise to 122,000 next year from 110,000 in 2011, the council said. Joblessness will continue to grow in 2013, when the number of people out of work will hit 128,000, the council said.

To contact the reporter on this story: Frances Schwartzkopff in Copenhagen at fschwartzko1@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net or Angela Cullen at acullen8@bloomberg.net

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