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German inflation up to one percent in February

German inflation ticked up slightly to 1.0 percent in February, preliminary data released on Friday by the national statistics office showed, but was expected to fall again soon.

Published: 27 February 2009 12:26 CET
German inflation up to one percent in February
Photo: DPA

The small rise from 0.9 percent in January on a 12-month basis ran counter to forecasts from analysts polled by Dow Jones Newswires who had expected inflation in the biggest European economy to dip to 0.8 percent.

German inflation had fallen to a 12-month rate of 0.9 percent, its lowest level since February 2004, but UniCredit economist Alexander Koch said Friday that, “the uptick in the headline rate in February is definitely not the end of the downward trend.”

Analysts agree that the sinking oil prices continue to hold the German inflation rate down. “The marked drop in energy prices has again been the main contributor to inflation retreating, and in particular the price of heating oil,” said Commerzbank analyst Simon Juncker.

According to the latest statistics, the fuel prices in six of Germany’s states have dropped by between 12.1 percent and 13.9 percent since February 2008, while the price for heating oil has dropped by as much as 18.4 to 29.4 percent in the same period. But in the past month, there have been contrasting tendencies. While fuel prices have risen by between 0.9 and 1.9 percent, heating oil prices have dropped again by between 5.7 and 11.7 percent.

Across the entire 16-nation eurozone, inflation dropped in January by the sharpest rate on record, slumping to 1.1 percent in the face of a severe economic downturn, according to official EU figures released on Friday.

The fall brought 12-month eurozone inflation to the lowest point since July 1999 and was down sharply from the 1.6 percent that the European Union’s Eurostat data agency recorded in December.

Inflation was expected to fall until July, “when the impact of last summer’s oil price bubble disappears from the year-by-year comparison,” Juncker pointed out.

Capital Economics economist Jennifer McKeown noted that, “as activity in Germany and the eurozone as a whole continues to deteriorate, the European Central Bank should become increasingly worried about the prospect of deflation.”

With inflation now well below the ECB’s target of just under 2.0 percent, “we see the ECB cutting interest rates to zero or very close later this year,” McKeown said.

The ECB has slashed its main interest rate from 4.25 percent to 2.0 percent in four steps since October, and financial markets expect it to reach an all-time low of 1.5 percent when bank governors meet here next week.

Juncker said that with inflation expected to fall briefly into negative territory, there was “scope for more rate cuts in the months ahead.”

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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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