"Denmark Business Forecast Report Q3 2013" is now available at Fast Market Research

The periodic flare up in sovereign debt stresses in the eurozone has left households and firms across Europe with frayed nerves. Although Denmark is not inside the eurozone, its close proximity to the epicentre of the crisis, coupled with deep financial and trade links that have been solidified by the pegged exchange rate regime, have left the economy significantly weakened.

Denmark is in the process of staging a modest economic recovery, but the outlook remains precarious. We expect only a minimal recovery in household consumption as ongoing eurozone stagnation, a severely weakened banking sector and a slow-to-recover housing market acto to weigh on households' confidence.

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Denmark has been singled out as a relative safe haven given the relatively more favourable public debt dynamics and the fixed currency regime. However, this inflow of capital has masked structural economic problems, and should investors start leaving the country it could expose an array of problems, most problematic of which could be a drop in house prices.

Major Forecast Changes

We have opted to downgrade our long-term growth forecast for Denmark, as we believe the country will struggle to boost productivity levels in the face of a rapidly ageing population. We now expect the real GDP to average just 1.2% over the next decade, from 1.6% previously.

Risks To Outlook

The biggest risk to Denmark's medium-term macroeconomic trajectory stems from ongoing economic and financial developments within the eurozone. Denmark has sizeable trade and investment linkages with the common currency bloc, and a major deterioration in growth in the core countries could push Denmark back into recessionary territory this year.

In light of growing disillusionment with the current government and inter-coalition tensions over the recent passing of tax legislation, there is potential for strains on the government's political cohesion to continue building. In turn, this could raise the potential for a break-up of the government and early elections being called further down the line.

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