(Bloomberg) -- Denmark’s government slashed its economic growth forecast for this year and the next as rising inflation erodes spending power and hurts the labor market. 

Gross domestic product will expand by just 2.8% this year, down from a May forecast of 3.4%, the finance ministry in Copenhagen said in statement on Wednesday. GDP will rise 0.8% in 2023, down from 1.9% seen before.

“We have to expect that high inflation and increased uncertainty will affect domestic growth, but we have a good starting point to withstand a period of limited growth,” Finance Minister Nicolai Wammen said in the statement.

Denmark’s economy emerged relatively well from Covid-19 lockdowns and the Nordic country’s strong labor market has been a driver of growth. The government said on Wednesday that it expects the gross unemployment rate to rise to 2.9% in 2023 from 2.4% this year. 

The inflation rate will jump to 7.3% this year, up from a previous forecast of 5.2%. Inflation will slow to 3.3% in 2023, the finance ministry predicts.

Earlier in Wednesday, Statistics Denmark had published GDP numbers showing the economy grew 0.9% in the second quarter, faster than the 0.7% the agency had reported in a preliminary reading two weeks earlier.

Separately, the government also published its 2023 budget proposal which contained 2 billion kroner ($270 million) set aside for aid to counter the effects of accelerating inflation. Denmark has already this year allocated 2.4 billion kroner in aid to low-income Danes hit by higher heating costs. 

The budget will be “tight and responsible” to counter the effects of inflation, Wammen said.

The Social Democrat government probably faces an election next month as one of its support parties has demanded a vote after a recent scandal around the government’s illegal order to kill all farmed mink over Covid-19 contamination fears.

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