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Denmark’s Economy Shrank More Than Estimated Last Quarter

Denmark’s economy contracted in the third quarter, after households spent less and the government cut expenditure, threatening to delay the nation’s recovery as twin housing and bank crises persist.

Gross domestic product shrank 0.8 percent from the second quarter, after growing 1.2 percent in the previous three-month period, Copenhagen-based Statistics Danmark said today. The economy contracted 0.2 percent from a year earlier, the office said. GDP was expected to shrink 0.4 percent on the quarter and remain unchanged from a year earlier, according to the median in a Bloomberg survey of seven economists.

Falling house prices have sapped consumer demand, while banks are calling in loans as funding markets remain closed to all but the biggest lenders. The government cut its 2011 forecast for private spending on Nov. 3, and estimates consumption will shrink 0.6 percent versus an earlier estimate for growth. One third of businesses face deteriorating financing prospects, the Confederation of Danish Industry said this week.

“It’s worrying because it’ll be more difficult to reverse the development,” said Steen Bocian, chief economist at Danske Bank A/S. “In contrast to 2008-2009, there’s not much room for a more expansive fiscal policy.”

The Social Democrat-led government of Prime Minister Helle Thorning-Schmidt expects the budget deficit to widen to 5.1 percent of GDP next year from 3.8 percent in 2011, limiting its scope to boost growth with additional spending.

Krone Peg

The central bank targets a fixed exchange rate and uses monetary policy to peg the krone to the euro. The bank this month lowered its main lending rate to 1.20 percent, pushing the benchmark lower than the European Central Bank’s rate for the first time. The ECB on Nov. 3 cut its main rate to 1.25 percent.

Denmark’s government pays less than Germany to borrow for two, five and 10 years. Two-year Danish notes yielded 10 basis points less than similar-maturity German bunds today, versus 11 basis points yesterday.

Denmark’s GDP has contracted in nine of the past 15 quarters, adjusting for seasonal swings, making it Scandinavia’s worst-performing economy.

“We are absolutely not optimists about Denmark’s prospects, given that the global economy took a marked turn for the worse over the summer, combined with signals of continued restraint from households and of caution by businesses,” Jes Asmussen, chief economist at Svenska Handelsbanken AB in Copenhagen, said in a Nov. 25 note.

Private spending fell 0.3 percent on the quarter while government expenditure shrank 1.6 percent. Exports grew 0.4 percent and fixed investments gained 0.3 percent, the office said.

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