UPDATE 2-Denmark sees painful recovery as economy stalls

Thu Dec 13, 2012 5:12am EST

* Govt, C.bank both see economy shrinking by 0.4 pct in 2012

* Growth in 2013 will be slower than earlier expected

* Budget deficit seen above forecasts in 2013

By Mette Fraende and Erik Matzen

COPENHAGEN, Dec 13 (Reuters) - Denmark's fledgling economic recovery has come to a halt and weak confidence, sluggish exports and low government spending will keep growth anaemic in 2013, the central bank and the government predicted on Thursday.

The triple A-rated economy will shrink by 0.4 this year after narrowly escaping recession in the third quarter and growth will barely rise above 1 percent next year, both institutions said in regular reviews on Thursday.

Euro zone outsider Denmark has outperformed its European Union peers in recent years but has fared worse than Nordic neighbours Sweden and Norway as a collapsing housing market cut deep into consumption, reduced confidence and put the banking sector under pressure.

"Growth in the Danish economy has declined in 2012 and, by all indications, has practically ground to a halt at the moment," Central Bank Governor Nils Bernstein said. "Danish consumers and firms continue to be hesitant ... (and) export market growth has been decreasing this year."

And some predicted that the new forecasts may still be too optimistic as the economy's main growth drivers have lost steam and key trading partners around Europe are themselves struggling with shrinking growth.

"We have probably not seen the last downwards adjustment from the government and the central bank," Nykredit senior economist Tore Stramer said.

"In a world with negative growth rates in the fourth quarter and a string of weak domestic activity data, it is difficult to see positive growth of 0.4 percent in the fourth quarter," Stramer said, referring to growth needed in the last three months to achieve the new forecast.

Private consumption, one of the economy's main drivers, has been anaemic despite record-low interest rates as a burst property bubble left many households indebted and wary of spending.

Exports have also faltered while the government, which has boosted spending in recent year to kick start the economy, is now reigning in expenditure.

"Both the central bank and the government are fundamentally more optimistic than we are. I hope they are right, but I doubt it," Handelsbanken chief economist Jes Asmussen said.

"We will need to see a significant change in the fourth quarter to end up with a 0.4 percent contraction in 2012," Asmussen added.

Still, in a glimmer of hope, the bank said house prices are beginning to rise and could increase 2 percent next year after cumulative falls of around 25 percent over the past five years and this should support consumption next year.

Indeed, household consumption will rise by 1.2 percent next year and residential investment, which fell over 9 percent this year, will turn positive in 2013, the bank predicted.

Export growth should also pick up from this year's 1.9 percent to 2.9 percent in the year ahead.

"2012 will neither be the year we thought it would be, or hoped for, it has unfortunately turned out to take longer for the Danish economy to recover," Economics and Interior minister Margrethe Vestager said.

The budget deficit, although shrinking, could also give the economy a bit of extra boost as the government sees next year's deficit at 2.5 percent of GDP, above a previous 1.9 percent target.