Denmark Vows to Protect AAA Rating Amid Stimulus Plan

Photographer: Freya Ingrid Morales/Bloomberg

Denmark's economy contracted 0.5 percent last year, its worst decline since 2009. Close

Denmark's economy contracted 0.5 percent last year, its worst decline since 2009.

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Photographer: Freya Ingrid Morales/Bloomberg

Denmark's economy contracted 0.5 percent last year, its worst decline since 2009.

Denmark’s government says plans to stimulate the economy, which has yet to surface from the fallout of a housing bubble that burst more than four years ago, won’t put its top credit rating at risk.

“A key element in our growth plan is to link our recovery to an upswing abroad, when that sets in,” Economy Minister Margrethe Vestager said in an e-mailed response to questions received yesterday. “We plan to do that by improving competitiveness, but we’ll stick to our plan to conduct responsible fiscal policies.”

Denmark’s house prices have slumped more than 20 percent since their 2007 peak, dragging down at least a dozen regional lenders and pushing the economy into a recession. The nation’s banking crisis has made credit scarce for small and medium-sized businesses, which employ about two-thirds of Denmark’s labor force. The government, which has so far kept its debt load at half the euro-zone average, has stable AAA ratings at Moody’s Investors Service, Standard & Poor’s and Fitch.

Gross domestic product shrank 0.7 percent in the fourth quarter from the third, Statistics Danmark said yesterday. Though that’s less than the 0.9 percent contraction estimated in February, the revision was driven by faster government expenditure. Exports sank more than first estimated. Public spending rose 1 percent, sales abroad dropped 2.1 percent and consumer spending fell 0.1 percent, the office said. Housing investment slipped 0.2 percent.

‘Very Weak’

“The picture is still of a very weak 2012,” Vestager said. “That just underlines the need for our growth package.”

The $300 billion economy contracted 0.5 percent last year, its worst decline since 2009. Danske Bank A/S, the nation’s largest lender, warns the government’s spending growth may put its finances at risk, while businesses fail to recover.

“The export drop was even bigger than feared, while growth in public expenditure was revised up significantly,” Steen Bocian, chief economist at Danske Bank in Copenhagen, wrote in a note. The figures suggest government spending is “out of step with what’s sustainable in the longer term and there is a need to bring public expenditure under control,” he said.

The Social Democrat-led government of Prime Minister Helle Thorning-Schmidt in February resorted to corporate tax cuts to boost demand. The measure will be financed through reduced spending on the elderly, the unemployed and students.

Aid Competitiveness

Thorning-Schmidt has said she wants to cut business costs and align Denmark’s corporate tax rate with Germany and Sweden to aid competitiveness. Danish unemployment has more than tripled since 2008, wiping out a third of the nation’s industrial jobs.

The three-party coalition on Feb. 26 pledged to lift annual economic growth to 2 percent on average from 2014 through 2020, and unveiled plans to create 150,000 private jobs by 2020 through stimulus measures.

Still, yesterday’s GDP report showed the number of people in employment was less than previously estimated in the fourth quarter, having dropped by 0.3 percent. The February report showed a 0.1 percent increase in people with jobs.

The “figures confirm the overall picture of a crisis in the Danish economy,” Bocian said.

Budget Deficit

Denmark’s budget deficit widened to 4 percent of GDP last year, exceeding the European Union’s 3 percent limit, according to the statistics office. The shortfall was 1.8 percent in 2011 and 2.5 percent in 2010, it said.

“This is the first time since the financial crisis hit that the deficit has been on the wrong side of the EU’s budget requirement,” said Jens Naervig Pedersen, an economist at Danske.

The wider deficit follows a one-time state payment to cover the phasing out an early retirement option.

“That expense won’t recur this year and should support public finances in the longer term,” Pedersen said. Denmark will probably keep its deficit within the EU’s 3 percent rule this year, he said.

The yield spread between Danish two-year notes and similar- maturity German bunds narrowed yesterday to 14.9 basis points, its smallest since Jan. 9, according to data compiled by Bloomberg. The 10-year spread to Germany was 19.2 basis points, little changed from the day earlier.

Lost Jobs

Some indicators suggest the economy has started to pick up. Industrial production grew 7.2 percent in January from December, while Denmark’s purchasing managers’ index indicates the manufacturing industry has expanded every month since August. Unemployment, including people in vocational training programs, held at 6 percent in February, compared with 6.1 percent at the end of last year.

Vestager repeated the government’s forecast of economic growth between 0.5 percent and 1 percent this year.

“We believe there’ll be an improvement in 2013, which the latest indicators support,” she said. “But one needs to be cautious when interpreting data from a single month.”

To contact the reporters on this story: Peter Levring in Copenhagen at plevring1@bloomberg.net;

To contact the editors responsible for this story: Jonas Bergman at jbergman@bloomberg.net;

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