Denmark: Country Economic Forecast: 04 May 2012

We continue to forecast GDP growth of 0.5% for 2012. Recent monthly data, such as rising consumer and industrial confidence, have been broadly in line with our expectations. But the weakness of external demand, as well as the pressure on household budgets, will continue to weigh on growth. The improvement in the manufacturing PMI, due in large part to a positive development in new export orders, suggests exports could surprise on the upside in Q2. But beyond the very short term, risks to the forecast remain skewed to the downside, mainly relating to a possible escalation in the Eurozone debt crisis. In April, two more small banks failed and fell into the hands of state administrators, and the consolidation in the banking sector is expected to continue. But the systemic risk to the banking sector as a whole seems limited. Only a total of DKK19bn was drawn from the central bank's new long-term liquidity facility, equivalent to just 1% of GDP and well below market expectations. But as the deleveraging and consolidation in the banking sector continues, bank lending will remain constrained. As a result, investment, which in Q4 2011 was still 18% below pre-crisis peaks, is unlikely to see much recovery this year.