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EARNINGS

Waning demand for exports fuels recession fears

The amount of goods turned out by German factories fell "strongly" in September as the global slowdown hit demand for products made by the world's top exporter, the government said on Friday.

Published: 7 November 2008 17:33 CET

In another sign that Europe’s biggest economy is probably in recession, industrial output fell by 3.6 percent in September from August, the economy ministry said. Economists polled by Dow Jones Newswires had forecast a fall of 2.0 percent.

On a less volatile two-month basis, output rose 0.5 percent in August and September from June and July, but it fell by 1.3 percent in the third quarter compared to the April-June period, the ministry said in a statement.

“The tendency of the last few months … is that production is clearly pointing downwards,” it said. “As a result of continued weak demand … perspectives for production are gloomy.”

The German economy shrank in the second quarter and figures next Thursday had been expected for some time to confirm that output also fell in the July to September period, meaning Germany is officially in recession. Berlin has slashed its 2009 growth forecast to just 0.2 percent, the slowest rate of growth since Germany last suffered a recession in 2003. Last Monday, Germany’s widely-watched Ifo sentiment indicator showed business confidence dropping in October to its lowest point in more than five years.

But Friday’s data, coupled with an eight-percent slump in orders announced on Thursday – the biggest fall since German reunification in 1990 – raises fears that the downturn may be deeper and longer than expected. The “huge drop is a worrying sign of a severe downturn to come,” Jennifer McKeown from Capital Economics said in a research note.

“With the service sector surveys pointing to stagnant output, next week’s GDP figures will almost certainly reveal another marked contraction, leaving Germany in its second recession in five years,” McKeown said.

This is borne out by a string of recent, highly downbeat assessments of conditions in the real economy from German companies – not just car giants like BMW and Daimler, but also in other sectors. Sportswear firm Adidas on Thursday said that uncertainty was so high it could not give a forecast for 2009, and on Friday reinsurance giant Munich Re dropped its 2008 profit target following a plunge in profits.

“A noticeable recovery before the second half of next year looks extremely unlikely. Lean times are ahead for the industrial sector,” Unicredit economist Alexander Koch said.

Both the European Central Bank and Chancellor Angela Merkel’s government have attempted to jumpstart growth, with the ECB joining other central banks in slashing interest rates and Berlin launching a stimulus programme.

But economists are sceptical that the ECB and governments have done enough to stop Germany and the entire Eurozone from entering a deep slowdown. The International Monetary Fund forecasted on Thursday that advanced economies would contract next year for the first time since World War II, with the Eurozone economy expected to decline by 1.3 percent.

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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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