Danish Economy Shrinks More Than Estimated as Spending Drops

Denmark’s economy shrank more than most economists estimated last quarter as household spending declined and investments sank.

Gross domestic product contracted 0.5 percent from the first quarter and 0.9 percent from a year earlier, the Copenhagen-based statistics office said in a statement on its website today. Output was seen shrinking 0.2 percent, both on the quarter and on the year, according to a Bloomberg survey of five economists. Private spending shrank a quarterly 0.9 percent while fixed investments dropped 4.2 percent, it said.

Denmark is struggling to emerge from twin housing and banking crises that have killed jobs and quelled consumer demand. The government estimates the economy will grow 0.9 percent this year, lagging behind growth rates in Sweden and Norway as Denmark proves more vulnerable to Europe’s deepening debt crisis than its Scandinavian neighbors.

“Many Danish consumers and companies held back on spending, probably in particular because economic prospects are so uncertain due to Europe’s debt crisis,” Jacob Graven, chief economist at Sydbank A/S, said in a note. “These weak figures suggest the government’s outlook for the year may be wishful thinking.”

Negative Spread

The yield on Denmark’s benchmark 10-year note eased three basis points to 1.053 percent as of 11:31 a.m. in Copenhagen, bringing the spread to similar-maturity German bunds to minus 26 basis points. The two-year yield rose two basis points to minus 0.167 percent, bringing the spread to same-maturity bunds to minus 14.5 basis points, the smallest negative difference since July 3, according to Bloomberg data.

“Given today’s data and the sluggish start to the third quarter, there’s no reason to expect that 2012 will be the year that Denmark enjoys a successful return to economic growth,” Helge Pedersen, chief economist in Copenhagen at Nordea Bank AB, said in a note.

Exports grew 2.5 percent in the quarter after falling 0.6 percent in the three months through March. Government spending grew 0.3 percent, the office said. The decline in household spending was driven by a 1.8 percent drop in purchases of vehicles and a 1.9 percent decline in services bought, it said.

Given the outlook in the rest of Europe, “it will be hard for Denmark to deliver any growth in the coming quarters,” Steen Bocian, chief economist at Danske Bank A/S in Copenhagen, said in a note. The bank will probably cut its 2012 estimate “drastically” from the 0.9 percent GDP growth it had predicted, he said.

“A somewhat optimistic outlook would be for zero growth this year,” Bocian said. “A more realistic view is that the economy will contract overall this year.”

Haven Status

Denmark’s government has focused on reining in its budget deficit and debt will be less than 30 percent of GDP this year and next. That’s won the nation a haven status as Europe’s debt crisis rages on. Denmark, which is home to some of the world’s biggest companies in their field including insulin maker Novo Nordisk A/S and container shipping owner A.P. Moeller-Maersk A/S, pays less than Germany to borrow for 10-years, while it has charged investors to hold its two-year notes through most of July and August.

The central bank last month cut its main rates to record lows, bringing the deposit rate to an unprecedented minus 0.2 percent. The bank, which uses monetary policy to maintain the krone’s peg to the euro, has battled a capital influx and said last month there’s no limit to how high foreign currency purchases can rise or how low rates can fall to uphold its mandate.

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