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ECONOMY

German GDP shrinks

The German economy shrank for the first time in nearly four years in the second quarter of the year, according to data released on Thursday.

Published: 14 August 2008 08:44 CEST
German GDP shrinks
Photo: DPA

The gross domestic product (GDP) of the world’s third-largest economy fell by 0.5 percent compared to the first quarter of 2008, the Federal Statistical Office said in a statement.

“The economic trend in the second quarter was characterized by decreasing household final consumption expenditure and smaller fixed capital formation,” the statement said.

The last time the German economy shrank was in the third quarter of 2004, as GDP contracted 0.2 percent. The Federal Statistical Office also revised 2008 first quarter GDP growth lower to an increase of 1.3 percent instead of 1.5 percent as first reported.

“We expected the weakening of growth in the second quarter,” German Economy Minnister Michael Glos said after the release of the data. Despite the slowdown he said the German economy was now more competitive and the government was sticking to its “consciously cautious” forecast of 1.7 percent growth for 2008.

Taken as a whole, the German economy expanded 0.8 percent in the first six months. But economists are not so sure Germany will hit the government target for this year, with Martin Lück at UBS saying that the second quarter result “means more than just a correction from an unusually strong first quarter.”

“Recent leading indicators … have all pointed to a sharp slowdown in the second half. Manufacturing output has slowed sharply in recent months, indicating that the prolonged period in which the German industry appeared to be immune against the toxic mix of global slowdown, strong currency and very high oil prices has now come to an end,” Lück said.

“With growth collapsing in Germany’s most important trading partner countries … we think recession is now also possible in Germany,” Lück said.

Commerzbank’s Jörg Krämer was also downbeat, saying the data “point to real economic difficulties ahead.”

“The leading indicators have meanwhile fallen sharply, suggesting that a hard landing is on the cards — although not as severe as in Spain or the UK,” Krämer said.

Figures also out on Thursday confirmed that inflation in Germany hit a 15-year-high of 3.3 percent high in July, driven by rampant energy and food prices.

The two sets of data illustrate the dilemma facing the European Central Bank.

In order to keep a lid on inflation – which reached a record 4.0 percent in July in the euro zone – it cannot risk lowering interest rates. But high borrowing costs in turn put the brakes on growth.

tl/dpa/afp

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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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