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ECONOMY

Bundesbank raises 2008 growth forecast, but cuts it for 2009

Germany's central bank said Friday that growth in Europe's largest economy might be more subdued over the coming months, but it expects a pick-up later as global conditions improve and inflation abates.

Published: 6 June 2008 13:39 CEST

“The German economy got off to a very strong start to 2008. Growth is likely to be more subdued in the second and third quarters, however,” the Bundesbank said in its June monthly report.

But growth “will pick up at the end of this year or early 2009 against the backdrop of a then more favourable global economic setting and a slowing rate of inflation,” it said.

The German economy posted “strong, broad-based” growth in the first quarter, expanding at a quarterly rate of 1.5 percent or by a real 2.6 percent when adjusted for the number of working days, clearly exceeding the Bundesbank’s forecasts.

Despite some special factors skewing the figures, “there is some evidence that the German economy’s intrinsic momentum or resilience has, to date, been underestimated,” it said.

But the Frankfurt-based bank agreed with economists that this strong performance at the start of the year would not continue, saying it expected “more moderate” growth in the coming months.

It now expects calendar-adjusted growth for the year as a whole of 2.0 percent. Due to the strong first quarter growth this represents a 0.4 percentage point increase from its last forecast in December.

Evidence this week added to signs that the first quarter growth rate was something of a one-off, with data on Friday showing that industrial production fell 0.8 percent in April.

“The fall comes after an equally sharp 0.8 percent drop in March … and suggests that industrial output is very unlikely to match Q1’s *(first quarter) strong 2.3 percent rise in Q2,” said Jennifer McKeown at Capital Economics.

And figures on Thursday from the economy ministry showed industrial orders fell for the fifth straight month in April, and at a faster pace than in March.

The chemical and automotive sectors showed the biggest fall in orders, but machine tools, a mainstay of the German economy, continued to post healthy results.

Strong price rises for food and energy are also making German consumers increasingly worried about how far their incomes would stretch, according to the recent survey by market research group GfK.

Official projections put inflation at 3.0 percent in May, with prices for heating oil rising as much as 13.3 percent just between April and May, and soaring by as much as 64.6 percent compared to May 2007.

But although the Buba said it was unlikely that inflation would fall below 3.0 percent in 2008, it said it could fall towards 2.0 percent in 2009, closer to the European Central Bank’s target rate of close to but below this level.

This, coupled with more favourable conditions outside Germany supporting demand for German exports, would help the economy pick up towards the end of 2008 or in early 2009, the Bundesbank said.

The Bundesbank cut its 2009 growth forecast by 0.6 percentage points to 1.4 percent.

The German government expects 1.7 percent growth in 2008 and 1.2 percent in 2009.

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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.

Published: 30 May 2023 15:46 CEST
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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