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ANGELA MERKEL

Germany plunges into deep recession

Chancellor Angela Merkel hosted an economic summit at the Chancellery on Wednesday, as the goverment admitted Europe's largest economy shrank dramatically n the first three months of the year.

Germany plunges into deep recession
Guttenberg and Steinbrück after the summit. Photo: DPA

Finance Minister Peer Steinbrück said the global slowdown “has meant that we have had a slump in the economy… in the first quarter of, I believe, 3.3 percent.”

Official figures for the first quarter of this year are not published until May 15.

Given the appalling figures both in the fourth quarter of 2008 and the first quarter of 2009, Steinbrück said the economy could slump by as much as five percent for the whole of this year.

“A five before the decimal point is not unlikely,” said the minister.

Steinbrück’s comments follow the latest projections by the International Monetary Fund showing that Germany’s economy would shrink by 5.6 percent – a forecast officials said was “not implausible.”

Berlin will unveil new economic projections for 2009 on April 29 and has already indicated it will sharply revise down its current estimate of -2.25 percent. Even that would be the worst recession in modern German history.

“The downward trend has, as before, not slowed down,” Steinbrück said.

Speaking at the same news conference following a crunch economic summit with Chancellor Angela Merkel and union and business officials, Economy Minister Karl-Theodor zu Guttenberg said: “I think we were all agreed around the table that we have a very difficult year ahead of us.”

Merkel hosted the summit at the Chancellery on Wednesday, meeting with business and trade union leaders to discuss getting Europe’s largest economy back on track.

Some 40 industry players analysed the effects of Germany’s two economic stimulus packages – worth a combined €80 billion – which are just now beginning to take effect on the country. However, there are no plans to consider a third such package.

“It was very clear today… that we should not be talking about a third stimulus programme, that the measures are working, that in some areas they should be further developed,” Merkel told reporters after the summit. “The second stimulus package gave us the instruments to work with, and therefore we will let these have an effect first.”

The high-profile meeting in Berlin was also intended to improve Germany’s response to the economic crisis by improving coordination between the government and the business community and trade unions.

The economic gloom hanging over Germany means the economy is certain to be a major battleground as Merkel bids for a second term in elections on September 27.

So far, a government scheme subsidising firms to cut working hours instead of laying off workers has helped broadly keep a lid on unemployment but one in 10 Germans could still be out of work when the country goes to the polls.

And the head of the DGB federation of German trade unions, Michael Sommer, warned in an interview ahead of Wednesday’s summit in Berlin that mass layoffs would be taken as a “declaration of war” by workers and unions.

“At that point, social unrest can no longer be ruled out,” Sommer told the Nordwest Zeitung regional daily.

“The size of the stimulus packages so far have been insufficient. They have to be strengthened and widened,” he said.

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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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