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ECONOMY

France heading for recession: Bank

The French economy is heading for a slight recession at the end of the year, the Bank of France forecast on Friday.

France heading for recession: Bank
Photo: Images of Money

It estimated that output would shrink by 0.1 percent in the last quarter, after an estimated setback of about the same amount in the third quarter.

This outlook underlines strains in the economy and comes in a week marked by a big effort by the government to reverse the falling competitiveness and a huge structural trade deficit.

The main thrust of new measures is to switch the cost of paying for social security and health benefits from employers to a wider tax base, and also to reduce public spending.

In the previous three quarters gross domestic product was flat.

These latest estimates are in line with those of the national statistics office INSEE and would mark the first recession since France was hit by the financial crisis in the first part of 2009.

A recession is considered to occur when output from one quarter to the next contracts for two quarters in a row. And emergence from recession, then a return to contraction within a few years, is commonly referred to as a double dip.

If output is flat or contracts for five quarters in a row, as the latest estimates indicate, this would be unprecedented in France since World War II.

INSEE expects the economy to have grown over the whole of 2012 by 0.2 percent, slightly less than the figure given by the government in its effort to reduce the public deficit to 4.5 percent of output at the end of the year.    

Strong growth is important because it leads to higher tax revenues and to lower charges for benefits such as unemployment.

The latest estimates put France on a gloomy footing for the beginning of 2013.

The government repeated on Thursday that it is counting on the economy growing by 0.8 percent next year, but economists consider this to be optimistic. So does the European Commission which revised down its forecast for next year this week to 0.4 percent, half the government's figure.

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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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