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ECONOMY

Steinbrück mulling state loans to combat credit crunch

German Finance Minister Peer Steinbrück said on Wednesday he was considering giving low-interest state loans to cash-strapped firms in order to prevent a credit crunch hampering a recovery in Europe's biggest economy.

Steinbrück mulling state loans to combat credit crunch
Photo: DPA

“If the efforts of banks are not sufficient to supply the economy with enough fresh cash, the state will have to make use of other measures,” Peer Steinbrück told the Handelsblatt business daily in an interview.

“This includes putting the (state development bank) KfW in a position to give loans to banks but with the clear condition that the low interest rates are passed completely and verifiably on to the companies,” he said.

Steinbrück said that other instruments could include state export guarantees and government help for credit insurers.

“There is no proof of a comprehensive credit crunch across the whole economy but in some sectors – electronics, machinery, suppliers, chemicals and shipbuilding – conditions have definitely worsened,” Steinbrück said.

“We also have clear signs that things are tight for very small and big firms,” he said.

Germany exited its worst recession in six decades with growth of 0.3 percent in the three months to June but economists and companies have warned that the reticence of banks to lend money was hampering a continued recovery.

The paper cited an Economy Ministry report as saying that loans in the second quarter were up 0.2 percent compared to the previous three months, and that year-on-year the increase was 4.3 percent. Interest rates were up 0.35 percentage points in June, the newspaper noted.

Steinbrück also hit out at banks and institutional investors following the recent sharp rises on stock markets, saying they “obviously prefer putting money in shares than doling out loans.

“I see this as evidence that the gambling mentality is winning the upper hand again after two years of financial market crisis,” 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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