Denmark Predicts Bigger Deficit as Economic Outlook Is Cut

Denmark said its budget deficit will widen as the government of Scandinavia’s weakest economy cut its growth forecast for this year.

Gross domestic product will grow 0.2 percent in 2013, less than the 0.5 percent forecast in May, the finance ministry said today. Weaker growth and increased spending will drive up the government’s budget deficit to 2 percent of GDP next year from 1.7 percent in 2013, it said.

Denmark’s $355 billion economy stagnated in the first quarter after shrinking 0.5 percent in 2012. The economy is struggling to emerge from a burst property bubble, which triggered a banking crisis and wiped out more than a dozen lenders since 2008. That’s undermined confidence and hurt consumer spending, which makes up half Denmark’s economy.

“We would need to have a very clear improvement of the Danish economy in the second half to even reach 0.2 percent growth,” said Steen Bocian, chief economist at Danske Bank A/S. “So the government is actually optimistic rather than pessimistic concerning the economic future, even as a forecast cut may indicate the opposite.”

House Prices

The government kept its 2014 GDP forecast for 1.6 percent growth. Private consumption will grow 0.4 percent this year and accelerate to 1.2 percent in 2014. House prices will rise 3 percent in 2013 and 2.5 percent next year, it said.

Denmark’s benchmark 1.5 percent 2023 government bond yielded 2.03 percent today or 16 basis points more than similar-maturity German debt. That compares with a record low spread versus Germany of minus 31 in November 2012, according to Bloomberg generic prices.

Finance Minister Bjarne Corydon said in an Aug. 21 interview that he plans to ease the 2014 budget as much as possible to help boost employment while staying inside European Union deficit restrictions.

The government has argued its fiscal restraint has enabled monetary stimulus as the nation’s haven status from Europe’s debt crisis drives down borrowing costs. The central bank’s efforts to defend the krone’s peg to the euro have left its deposit rate below zero since July last year.

The Finance Ministry said today the 2014 budget will “support growth and employment” as the structural deficit reaches 0.4 percent of GDP, just shy of a 0.5 percent EU threshold.

The government in May cut its 2013 GDP forecast to 0.5 percent growth from 0.7 percent seen in April. The central bank on June 12 also cut its 2013 GDP forecast to 0.5 percent growth, from 0.8 percent previously.

Denmark’s finance ministry said late yesterday that the country’s domestic financing need will decline to 102 billion kroner ($18.3 billion) in 2014. That compares with a revised 2013 domestic financing need of 136 billion kroner.

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