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ECONOMY

Bundesbank warns inflation could jump

The German central bank warned on Saturday that inflation could be higher than it had predicted due to recent public-sector deals for wage hikes.

Bundesbank warns inflation could jump
German inflation was over 3 percent in March. Photo: dpa

Earlier this week German services union Verdi — the biggest in the country — and public-sector employers struck a deal on wage rises of around eight percent over two years for 1.3 million employees.

“The wage agreements are sharply higher than we expected,” Bundesbank president Axel Weber told journalists while in the Slovenian capital for a meeting of EU finance chiefs nearby.

“We are going to have a close look at the (inflation) forecasts to see if public-sector wage deals don’t make a revision necessary,” he said, adding that those agreements often set the tone for other pay negotiations.

“We are concerned about that,” he said, insisting that the German public sector was in a unique situation because it had gone without pay increases for several years.

Eurozone finance ministers and central bankers, meeting for two days in Brdo pri Kranju, Slovenia, warned on Friday that demands for big wage hikes could fuel a dangerous inflation spiral.

In the face of their warnings, at least 30,000 European trade union members were due to march in Ljubljana on Saturday as part of a drive for higher wages.

Inflation in the 15 eurozone countries jumped in March to 3.5 percent — the highest level since the bloc was formed in 1999, according to official EU data earlier this week.

In the face of such inflation, eurozone officials say that wage demands should not exceed productivity growth.

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ECONOMY

How is Denmark’s economy handling inflation and rate rises?

Denmark's economy is now expected to avoid a recession in the coming years, with fewer people losing their jobs than expected, despite high levels of inflation and rising interest rates, The Danish Economic Council has said in a new report.

How is Denmark's economy handling inflation and rate rises?

The council, led by four university economics professors commonly referred to as “the wise men” or vismænd in Denmark, gave a much rosier picture of Denmark’s economy in its spring report, published on Tuesday, than it did in its autumn report last year. 

“We, like many others, are surprised by how employment continues to rise despite inflation and higher interest rates,” the chair or ‘chief wise man’,  Carl-Johan Dalgaard, said in a press release.

“A significant drop in energy prices and a very positive development in exports mean that things have gone better than feared, and as it looks now, the slowdown will therefore be more subdued than we estimated in the autumn.”

In the English summary of its report, the council noted that in the autumn, market expectations were that energy prices would remain at a high level, with “a real concern for energy supply shortages in the winter of 2022/23”.

That the slowdown has been more subdued, it continued was largely due to a significant drop in energy prices compared to the levels seen in late summer 2022, and compared to the market expectations for 2023.  

The council now expects Denmark’s GDP growth to slow to 1 percent in 2023 rather than for the economy to shrink by 0.2 percent, as it predicted in the autumn. 

In 2024, it expects the growth rate to remain the same as in 2003, with another year of 1 percent GDP growth. In its autumn report it expected weaker growth of 0.6 percent in 2024.

What is the outlook for employment? 

In the autumn, the expert group estimated that employment in Denmark would decrease by 100,000 people towards the end of the 2023, with employment in 2024  about 1 percent below the estimated structural level. 

Now, instead, it expects employment will fall by just 50,000 people by 2025.

What does the expert group’s outlook mean for interest rates and government spending? 

Denmark’s finance minister Nikolai Wammen came in for some gentle criticism, with the experts judging that “the 2023 Finance Act, which was adopted in May, should have been tighter”.  The current government’s fiscal policy, it concludes “has not contributed to countering domestic inflationary pressures”. 

The experts expect inflation to stay above 2 percent in 2023 and 2024 and not to fall below 2 percent until 2025. 

If the government decides to follow the council’s advice, the budget in 2024 will have to be at least as tight, if not tighter than that of 2023. 

“Fiscal policy in 2024 should not contribute to increasing demand pressure, rather the opposite,” they write. 

The council also questioned the evidence justifying abolishing the Great Prayer Day holiday, which Denmark’s government has claimed will permanently increase the labour supply by 8,500 full time workers. 

“The council assumes that the abolition of Great Prayer Day will have a short-term positive effect on the labour supply, while there is no evidence of a long-term effect.” 

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