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German economic confidence up despite recession reports

Germany's closely watched ZEW economic indicator picked up Tuesday, as investors' mood improved slightly amid international efforts to come to grips with the financial crisis.

German economic confidence up despite recession reports
A file photo of stock traders in Frankfurt. Photo: DPA

But two days before the government was expected to confirm that the world’s top exporter is in recession, experts warned that the country’s prospects were still far from bright.

The ZEW economic research institute said its investor sentiment index had risen to minus 53.5 points this month from minus 63.0 points in October, up from a record low of minus 63.9 in July.

The result was better than expected. Economists polled by Dow Jones Newswires had forecast a result of minus 58.5 points.

“The earlier pessimistic expectations of the financial market experts are confirmed by the current economic development in Germany. The experts, however, seem hopeful that the collective actions of governments and central banks will mitigate the economic slowdown,” a statement quoted ZEW president Wolfgang Franz as saying.

Since financial markets were plunged into turmoil following the collapse of US investment bank Lehman Brothers, central banks around the world have sharply reduced interest rates in a bid to stimulate economic activity.

Major central banks including the US Federal Reserve, the European Central Bank (ECB) and the Bank of England (BOE) cut rates simultaneously by 0.5 percent in a co-ordinated move on October 8.

The ECB cut interest rates by a further 0.5 percent to 3.25 percent last Thursday, while on the same day, the Bank of England slashed its rate by a further record 1.5 percent, to three percent.

Meanwhile, governments around the world have approved multi-billion euro packages aimed at rescuing troubled banks and stimulating economic activity.

Leaders of the G20, which includes the seven leading economies and key developing ones, will meet Saturday in Washington to discuss the way forward to ensure that the worst financial crisis since the Great Depression is not repeated.

But although the ZEW indicator was better than had been expected, analysts warned that the prospects for Germany’s economy remained gloomy.

Unicredit economist Alexander Koch said the index is still at “clearly recessionary levels, with no sign of bottoming out.”

“There is no doubt about it: The German economy is sliding into a recession,” Koch warned.

Berlin recently cut its forecast for economic growth in Germany to a mere 0.2 percent in 2009, as the crisis takes its toll on economies around the world.

The government will publish figures on Thursday for economic growth in the third quarter of the year and if growth contracted for the second three-month-period running, as widely expected, the biggest European economy will be officially in recession.

Five leading economic institutes – known as the “wise men” – will also release updated projections for growth in Germany on Wednesday. According to press reports over the weekend, they are expected to say the economy will register no growth at all in 2009.

Capital Economics economist Jennifer McKeown noted that the ZEW index was still at a “very low level” and warned, “far more investors expect the German economy to weaken further over the next six months than think that conditions will improve.”

For her part, McKeown predicted that the Germany economy would fall by 0.5 percent next year.

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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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