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ECONOMY

Eurozone deal boosts investor confidence

The outcome of last week's EU euro crisis summit has given German investor confidence an unexpected boost, data showed on Tuesday, but the positive surprise could prove short-lived, analysts warn.

Eurozone deal boosts investor confidence
Photo: DPA

The closely watched ZEW economic expectations index — which has fallen for nine months in a row and reached its lowest level in three years last month — showed a surprise rise of 1.4 points in December to stand at minus 53.8 points, the ZEW think tank said in a statement.

Analysts had been pencilling in a further decline after the index fell to minus 55.2 points in November, its lowest level since October 2008.

“The downward trend has come to a halt. Economic expectations seem to have bottomed out,” said ZEW chief Wolfgang Franz. “Financial analysts are clearly still expecting low growth, but not a crash of the German economy in the next six months.”

“The decisions taken at the latest EU summit will have had a positive effect on sentiment. Pending the finalisation of the actual details, those decisions mark an important step towards creating a functioning framework for monetary union,” Franz said.

Nevertheless, at its current level, the ZEW barometer was still way below its historical average of 24.6 points and while the sub-index measuring analysts’ assessment of the current economic situation remained in positive territory, it fell for the fifth month in a row, the think-tank noted.

Nervousness arising from the eurozone debt crisis has weighed on investor confidence for several months now “and with the index still in negative territory in December, that points to an economic slowdown in the coming half-year,” ZEW said.

Nevertheless, a raft of recent economic data showed that the German economy, Europe’s biggest, is holding up fairly well to the sovereign debt crisis so far even if growth is widely expected to slow noticeably next year.

At a make-or-break summit last week, EU leaders banded together to back tighter budget policing in a desperate bid to save the eurozone.

After years of foot-dragging on deepening integration, 26 of the 27 EU states signalled their willingness to join a “new fiscal compact” to resolve the debt crisis threatening to crack apart the monetary union. Initially, financial markets showed relief at the outcome.

But European shares fell again on Monday as the international credit rating agency Moody’s said Europe had failed to deliver “decisive policy measures” to fix the eurozone debt crisis and it would put all EU sovereign debt ratings under review as a result.

Analysts were therefore wary about reading too much into the latest ZEW data and said Germany may still be headed for recession.

“The slight improvement in confidence may prove temporary,” said Berenberg Bank senior economist Christian Schulz. “Even though the summit did deliver the expected results, additional action from the European Central Bank remains elusive.

“More and more investors fear that the German economy may already be grinding to a halt as an effect of the confidence crisis. As the euro crisis continues, Germany is likely to fall into recession with the rest of the currency zone this winter,” Schulz said.

Jennifer McKeown, senior European economist at Capital Economics, agreed.

“Despite rising slightly in December, the German ZEW index points to a risk of recession in the coming months,” she said. “The increase did not reverse last month’s fall and the current level means that a large majority of investors still expect conditions to deteriorate in future.”

The ZEW is not always viewed as a particularly reliable predictor of the future direction of the economy and “more reliable business surveys paint a less gloomy picture,” McKeown noted.

“But even they suggest that the recovery has ground to a halt,” she said, predicting a contraction in the economy next year “as the debt crisis intensifies and the eurozone starts to break up.”

Barclays Capital Research economist Thomas Harjes was not so pessimistic.

“The latest ZEW figures add further evidence to our view that, following a soft patch and some negative growth in the fourth quarter, German GDP (gross domestic product) will record modest, positive growth again in early 2012,” he said.

AFP/mry

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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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