Denmark fell into recession in the first quarter as a sharp fall in household consumption blamed on the government's belt-tightening policies took analysts by surprise. Statistics Denmark said the economy contracted 0.5 percent in the first quarter compared to the last three months of 2010.
Fourth quarter 2010 data was revised, however, to show the economy shrank 0.2 percent, less than the initial 0.4 percent fall given. A nation is deemed to be in recession if its economy contracts for two consecutive quarters. Denmark's return to recession after more than a year in the clear surprised analysts who, according to a poll by Dow Jones Newswires had expected the Scandinavian country to post 0.5-percent growth in the first quarter. Denmark suffered badly during the global financial crisis but was back in positive territory by the third quarter of 2009.
Unlike the European Union as a whole and the United States, which posted growth in the first quarter, the Danish economy slumped back into the red as it was hit by falling consumption. "There was a decline of 1.9 percent in domestic demand, where private consumption, public spending and investments fell," Statistics Denmark said, noting that household consumption dropped 0.8 percent while gross investments plummeted 8.3 percent.
The statistics agency said higher exports had provided some support. Year-on-year, Denmark's economy grew 1.1 percent in the first quarter. Analysts told AFP they were surprised by the new figures, blaming the centre-right government's belt-tightening measures. "This is a very disappointing and unexpected trend," Danske Bank chief analyst Steen Bocian said.
"It was surprising because we were not expecting that public spending would fall so much, by 0.8 percent, which is four times as much as forecast by the government," he said, adding it was clear the "government has tightened the belt too much on public finances, crippling consumption." Rasmus Gudum-Sessingoe, an analyst with Handlesbanken Capital Markets, agreed.
"The greatest challenge will be to revive private consumption, one of the growth engines, because households are more concerned about reducing their (property) debt than about consuming," he told AFP. "Rising inflation, boosted by a hike in energy prices, is not an encouraging sign when it comes to reviving consumption and boosting the economy," he added.