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UPDATE 2-Denmark sees 2015 deficit at EU limit, analysts query growth forecast
August 26, 2014 / 8:42 AM / 3 years ago

UPDATE 2-Denmark sees 2015 deficit at EU limit, analysts query growth forecast

* Denmark keeps 2015 GDP forecast at 2 pct despite euro zone woes

* GDP data on Friday will shed light on recovery

* Finance minister cites ECB comments on stimulus as defence (Adds analyst, finance minister, regional comparisons, writes through)

By Teis Jensen and Stine Jacobsen

COPENHAGEN, Aug 26 (Reuters) - Denmark’s budget deficit will hit the European Union’s 3 percent limit next year as its economy expands 2 percent, government proposals showed, but economists said the estimates may be too hopeful as the euro zone recovery has stalled.

Denmark is a laggard among Scandinavia’s economies, which have been pressured by a faltering recovery in countries such as Germany, France and Italy. Only Norway, with its strong oil sector, appears to have turned the corner.

While the government proposals issued on Tuesday for the 2015 budget deficit and economic growth were unchanged from a previous forecast, analysts said the estimates do not reflect recent European data.

Denmark will issue its own second-quarter gross domestic product (GDP) data on Friday and analysts polled by Reuters see on average 1.0 percent growth year-on-year, slowing from 1.3 percent in the first quarter. Some are more pessimistic.

“It is our expectation that growth would have returned to negative territory and if that is the case, the government’s new forecasts would already be out of date and it would probably be forced to downgrade its growth prospects,” said Jes Asmussen, chief economist at Handelsbanken Capital Markets.

The government’s deficit forecast for next year also leaves it little room to manoeuvre in spending, especially if growth disappoints. Denmark has only this year exited from the European Commission’s fiscal oversight scheme.

But others pointed out that the government had little choice but to stick to its growth figure if it wanted to stay within the EU budget deficit limit. A weaker forecast would have automatically pushed the deficit number above 3 percent.

The 2014 and 2015 deficit and economic growth figures confirm an earlier Reuters report on Monday.

The 2015 budget proposals did trim this year’s budget deficit forecast to 1.2 percent from 1.4 percent. The deficit was 0.9 percent in 2013 but that year and this year both benefit from temporary revenues due to pension-related tax incentives.

That positive impact will cease as of next year, partly explaining the forecast return to the EU’s limit on deficits.

STIMULUS FOR GROWTH

While Scandinavian nations have fared far better than other European countries during the crisis years, their export-driven economies are dependent on EU demand for their products.

Sweden’s economy grew 1.9 percent in the second quarter, below expectations, and has cut its full-year forecast to 2.2 percent this year from a previous 2.7 percent.

Finland pulled out of recession in the second quarter but has yet to reach pre-crisis levels and is vulnerable to the West-Moscow standoff over Ukraine due to its large exports to Russia. It expects 2014 GDP growth of 0.2 percent.

Norway, not an EU member, is the only bright spot, posting 1.2 percent growth in the second quarter, even when the oil and gas sector were excluded and far higher than the 0.6 percent that had been expected.

Danish Finance Minister Bjarne Corydon defended the 3 percent deficit estimate, citing recent comments by European Central Bank chief Mario Draghi which appeared to place more emphasis on fiscal stimulus than austerity.

“I noticed that the head of the European Central Bank recently encouraged countries to make full use of the available space within (budgetary) limits; to do their best to keep growth and employment rolling. In this connection, Denmark is indeed a very good case,” Corydon told a news conference.

This is the last budget that the Social Democrat coalition government will present, as elections are due next year. The proposal is now up for horsetrading as the minority government seeks to find enough support for it to pass in parliament.

Political pundits will be watching out for the reaction of the Red Green Alliance party - politically natural partners of the Social Democrats though not in the coalition government - to see whether they will work together in the next election.

Polls show the main opposition party, the Liberal Party, is in the lead with 23 percent while the Social Democrats have 21 percent, and the bloc that tends to ally itself with the Liberals leads the parties that tend to side with the Social Democrats by 9 percent. (Writing by Sabina Zawadzki; Editing by Alistair Scrutton)

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