Page last updated at 16:28 GMT, Monday, 28 July 2008 17:28 UK

Danish recession warns of tough times

By Manuela Saragosa
Business reporter, BBC World Service, Copenhagen

The Little Mermaid, Copenhagen
Calm for now, but the Danish economy could be entering choppier seas

It is hard not to notice the many cars with Swedish number plates driving around Copenhagen.

The Danish capital is connected to Malmo, the Swedish port, by a 16 kilometre bridge-tunnel link, making it easy for Swedes to commute here for work.

And many do.

Denmark may have registered two consecutive quarters of falling economic output - technically putting the country in recession - but there is no shortage of jobs.

"The Dane on the street does not feel this recession severely yet due to the fact that we have a very tight labour market and unemployment is still at a 30-year low," says Jes Asmussen, chief economist at Handelsbanken Capital Markets in Copenhagen.

Costly food

But Mr Asmussen believes Danes are going to feel this recession bite a lot more in the coming year.

Perhaps the situation is not quite as bad as these figures suggest
Jes Asmussen, chief economist at Handelsbanken Capital Markets

The country's low unemployment rate of just 1.8% - compared with a eurozone average of 7.2% - is both a blessing and a curse.

Labour shortages mean firms have long struggled to find personnel. Consequently, labour productivity fell during the last three months of 2007, contributing to a revised 0.2% decline in economic output in that quarter.

Moreover, employers are having to compete on wages to attract good candidates.

Higher wages have added to inflation and pushed up interest rates at a time when Danes are feeling the pinch of rising world food and petrol prices.

"Groceries, vegetables, meat, everything has gone up," says Isabelle Zumot, who lives her partner Martin Camara and two young daughters in north Copenhagen.

"My friends all talk about how food prices are rising."

Falling property prices

As is the case across Europe, rising food prices are stretching the budgets of many Danish households, and this may explain why the average Dane has started to rein in spending, a factor that contributed to a fall in economic output of 0.6% in the first three months of 2008.

Map of Denmark

Household spending accounts for almost half of Denmark's 1.6 trillion kroner ($340bn; 170bn) economy.

And with Danish house prices falling, many homeowners are starting to feel poorer.

"The main risk factor for the economy is what happens to the housing market," says Professor Peter Birch Soerensen, chairman of the Danish Economic Council, which advises the government on economic policy.

House prices have been on the slide since the end of 2006 as a construction boom of the past few years flooded the market in Denmark's biggest towns with a huge number of new apartments.

In some areas of Copenhagen, prices have already come down by as much as 25%.

Failed lender

That fall has already claimed its first big victim here in Denmark in the form of the lender Roskilde.

Earlier this month the Danish central bank bailed out the lender after it was forced to make a sharp write down in the value of its real-estate assets.

In some parts of Denmark, particularly the big cities, "the market has come to a complete stop", says Steen Winther-Petersen, chairman of the National Association of Real Estate Agents.

"We do have, as I see it, too much under construction at the moment."

Better than it seems

Cranes are still busy shifting building materials as new apartment blocks are being built in and around Copenhagen.

Mr Winther-Petersen notes that it takes up to 18 months to get a building permit, so many projects that have been in the works for a while are still under construction.

"It's like a supertanker," he says. "You can't just pull the brake and stop immediately."

He says a few of the smaller construction companies are already closing down their business and predicts that some of the bigger ones will start having serious problems in the short-term.

But while the signs all point to a further weakening of the economy for the rest of this year, there are still some doubts about the accuracy of the economic statistics that show Denmark to be in recession.

"Danish GDP figures are notoriously volatile and I think we should not put too much weight on the actual quarterly figure," says Handelsbanken's Mr Asmussen.

"Perhaps the situation is not quite as bad as these figures suggest."

Big revisions from Denmarks's statistics office are not unusual. In 2002, it was estimated the economy had grown 1.6%. That figure was later cut to 0.5%, a big revision by any standard.

It is not surprising then that some economists believe Denmark's economic growth figure may be revised to show that the downturn at the beginning of this year was not as severe as some people feared.

But it all comes back to those hundreds of apartments being built in the bigger cities.

Whether or not they sell, and at what price, will be a strong indicator of where the country's economy goes from here.

Country profile: Denmark
08 Jul 08 |  Country profiles
Denmark 'world's happiest nation'
03 Jul 08 |  Special Reports

Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit


Americas Africa Europe Middle East South Asia Asia Pacific