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ECONOMY

Borg warns of looming recession in Sweden

Sweden's finance minister Anders Borg warned on Monday that the country may be headed toward a recession, while also saying the government is considering other ways to get banks to join its state-sponsored lending programme.

Borg warns of looming recession in Sweden

The first of two scenarios outlined by Borg assumes that the current financial crisis will deepen and points to economic growth of 0.1 percent next year and 2.0 percent in 2010.

In the government’s previous forecast, published in its autumn budget bill in September, growth was seen at 1.3 percent in 2009 and 3.1 percent in the following year.

In the second scenario, under which the crisis is expected to be deeper and more protracted, the Swedish economy was expected to contract by 1.2 percent next year and grow 1.4 percent in 2010

Borg also said the government would consider other, unspecified measures if the country’s banks did not join a state-sponsored guarantee scheme for new lending.

So far, only Swedbank has joined the programme while the other big Swedish banks — Nordea, Handelsbanken and SEB — have remained on the sidelines.

The government introduced the plan as part of a package of measures to improve financial stability.

Borg’s comments came after Swedish Financial Markets Minister Mats Odell said in a radio interview over the weekend that Sweden would consider whether to make its new debt guarantee scheme for banks compulsory.

Borg also told a news conference the government was considering measures to support the vehicles industry.

“It’s clear that there are special hardships in the industry which we need to listen to,” he said.

Borg also characterized the current wave of job loss announcements as the worst since the country’s banking crisis in the early 1990s.

He estimated that unemployment may jump as high as 7.8 percent in 2009 and 9.2 percent in 2010.

Borg also forecasts the Riksbank will further reduce the benchmark repo rate to 3.5 percent following its next monetary policy meeting on December 16th.

According to Borg, Sweden’s interest rates will drop further in 2009 to between 2.25 and 2.75 percent, before bottoming out between 2.00 and 2.25 percent.

During the press conference, Borg said that the financial crisis, combined with worsening global economic conditions, will likely deepen and lengthen the economic downturn in Sweden.

Swedish exports are expected to decline and household consumption will also slow, according to Borg, who added that he thinks inflation has peaked and that inflation expectations are now falling.

AFX/TT/The Local

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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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