Denmark Enters Recession, GDP Shrinks Quarterly 0.6%

Denmark slid into recession in the first quarter, the first European Union economy to contract for two consecutive quarters since the global credit crunch started last year.

The economy shrank 0.6 percent, after contracting a revised 0.2 percent in the fourth quarter, Copenhagen-based Statistics Denmark said in a statement on its web site today. The median estimate of four economists in a Bloomberg survey was for growth of 0.2 percent. The economy contracted an annual 0.7 percent.

Growth is slowing worldwide as the credit squeeze sends borrowing costs higher and curbs investment, while record oil prices and soaring food costs erode consumer spending power. Danish consumer prices are rising at the fastest pace in 18 years while property values fall, undermining household spending that accounts for half the $340 billion economy.

"This confirms the picture of an economy that's coming to an abrupt halt,'' Jes Asmussen, chief economist at Handelsbanken in Copenhagen, said in a note to clients. ``Economic growth this year is fading markedly and will be replaced by an economy that's completely stagnated by next year.''

The contraction was led by a 1.1 percent slump in household spending from the fourth quarter, while fixed investment dropped 0.6 percent, the office said. Government expenditure shrank 1.4 percent. Exports grew 1.1 percent, exceeding import growth of 0.4 percent, the office said.

Unemployment
Exports may come under pressure as a labor shortage pushes up production costs and a global economic slowdown hurts demand. That spells reduced demand for workers in the Nordic economy, according to Asmussen.

"Unemployment will rise faster than the consensus picture currently suggests,'' Asmussen said. "The downside risks for the Danish economy are pronounced.''

Randers, Denmark-based Danish Crown AmbA, Europe's biggest producer of pork, said last month it will cut 900 jobs. Biotechnology company Pharmexa A/S said on June 25 it plans to cut 40 percent of its workforce to save costs.

Retail sales dropped 0.6 percent in May from a month earlier, the statistics office also said today, indicating that consumer spending didn't pick up in the second quarter.

'Bleak'
"It's a bleak growth picture for the Danish economy,'' said Jakob Legaard Jakobsen, an economist at Nykredit Bank A/S in Copenhagen. ``The data are an unpleasant surprise and a clear signal that the economic reality has markedly changed its character compared with earlier years.''

Inflation accelerated to an annual 3.4 percent in May, the office said on June 10. The economy grew 1.8 percent in 2007 and 3.9 percent in 2006. Unemployment dropped to 1.7 percent in May.

The central bank doesn't target price stability as its sole mandate is to keep the krone pegged to the euro in a 2.25 percent band. It last raised the key lending rate on May 16 by 0.1 of a percentage point to 4.35 percent to defend the currency peg.

"The Danish economy has now entered new times,'' said Niels Roenholt, an economist at Jyske Bank A/S in Silkeborg, Denmark. "Today's numbers are without doubt just a foretaste of what's to come.''

Source: Bloomberg