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ECONOMY

Indicator suggests Germany may escape recession

German investors do not expect a recession in Europe's biggest economy, a key indicator suggested Tuesday, as cheaper oil and a weakening euro take some of the pressure off firms and consumers.

Indicator suggests Germany may escape recession
File photo of the German stock exchange in Frankfurt. Photo: DPA

The ZEW research institute said its index of economic sentiment stood at minus 55.5 points, up 8.4 points from July when the survey hit its lowest level since its creation in December 1991.

“The improvement … signals that fear about an economic downturn among financial market experts is contained. The recent fall in the price of oil and the weakening of the euro against the dollar must have dampened economic concerns about the economy,” the ZEW said.

“Market experts have not been particularly taken aback by the negative growth rate of the second quarter. They expect weaker but all in all solid economic conditions and do not fear a recession.”

The ZEW forecast, based on a survey of 300 analysts and institutional investors, was better than expected with economists polled by Dow Jones Newswires looking for a reading of minus 62 points.

Data out last week showed that the German economy, which accounts for a third of total eurozone output, went into reverse in the second quarter for the first time for nearly four years, contracting by half a percent.

The data sent shockwaves through the markets on fears that Europe’s powerhouse was headed for recession a year after the subprime crisis began, dragging the entire 15-nation single currency area with it.

With Germany’s eurozone partners such as France, Italy, Spain and Ireland also in the doldrums or worse, the bloc’s gross domestic product (GDP) fell 0.2 percent in the second quarter, the first contraction since monetary union.

If an economy shrinks for two consecutive quarters it is officially in recession.

Two of the main culprits were rampant energy and food prices putting a squeeze on companies and consumers alike, pushing up prices for manufacturers and blowing a hole in household budgets.

And adding to the squeeze on firms has been the euro’s seemingly inexorable rise against the dollar over recent months.

A stronger euro means that exporters get fewer euros for every dollar they are paid for their products, forcing them to raise their prices to levels where they are less competitive than those of their rivals.

But in the past six weeks oil prices have fallen sharply, reaching close to $111 per barrel compared with a high of more than $147 on July 11, and the euro last week hit a six-month low against the greenback.

This also cuts some slack for the European Central Bank.

The ECB has been unable to cut interest rates and therefore spur economic activity because of its strict mandate to keep a lid on inflation – which in July hit a record 4.0 percent in July in the eurozone.

But economists sounded a cautious note.

“Both oil and the euro have only simply corrected their sharp advance of recent months, and both have made strong gains year on year, i.e. are still a strain on the economy,” Matthias Rubisch at Commerzbank said.

“Easing pressure from oil and the euro will probably not be sufficient in themselves to trigger a renewed upswing,” he said.

Andreas Rees at UniCredit agreed: “(It) has become crystal-clear that markedly slower growth lies ahead, as the negative momentum from the global economy is increasingly carrying over into Germany.

“The euro-dollar exchange rate and the oil price might dampen the slowdown, but certainly cannot prevent it.”

The German exporters’ federation BGA was also anything but upbeat, forecasting on Tuesday a slowdown in exports growth this year to around five percent from 2007’s 8.5 percent.

“I do not believe that the dollar is going to come back to levels where we can really celebrate,” BGA head Anton Boerner said. “And for the oil price it is the same.”

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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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