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German economy enjoying ‘solid upturn’

The German economy is currently in the middle of a "solid upturn", the government said on Tuesday, even if concerns about the fallout from Ukraine are souring investor confidence.

German economy enjoying 'solid upturn'
Photo: DPA

Economy Minister Sigmar Gabriel said that economic growth "is on a broad and stable footing," as he predicted that gross domestic product (GDP) growth would accelerate to 1.8 percent this year and two percent next year compared with a meagre 0.4 percent in 2013.

"The German economy is in a solid upturn," Gabriel insisted. "The driving force is domestic demand," the minister explained, pointing to "continued favourable developments on the labour market, strong increases in household income, positive business sentiment and rising investment."
   
Gabriel's forecasts are in line with the predictions of other key observers.
   
Germany's central bank is pencilling in growth of 1.7 percent for 2014 followed by two percent for 2015 and the European Commission is projecting growth rates of 1.8 percent and 2.0 percent respectively.
   
Just last week, Germany's leading economic think tanks raised their growth forecast for this year to 1.9 percent, followed by growth of two percent next year.
 

Clouds on horizon

However, some clouds seem to be beginning to form in the economic skies above Germany.
   

The economic institutes warned of headwinds from new government policies, such as the decision to lower the retirement age to 63 and the introduction of a fixed national minimum wage from 2015.
   
And in the more immediate term, too, geopolitical factors could also throw a spanner in the works of the nascent recovery.
   
The Ukraine crisis is hitting the investment climate in Germany which has close business and energy links with both Russia and Ukraine.
 
Investor sentiment fell to the lowest level for eight months in April, a leading survey found.
   
The widely watched investor confidence index calculated by the ZEW economic institute fell by 3.4 points to 43.2 points in April, the lowest level since August 2013.
   
It was the fourth straight monthly drop in a row and steeper than analysts had been expecting.
   
ZEW president Clemens Fuest pointed to uncertainty generated by the conflict in Ukraine.
   
One mitigating factor was that a component of the index measuring financial market players' view of the current economic situation in Germany rose by 8.2 points to 59.5 points in April, its highest level since July 2011.

No stagnation or recession
 

Berenberg Bank economist Christian Schulz said that while the crisis in Ukraine "is continuing to sow uncertainty among financial analysts," and could lead to a slowdown in German economic momentum over the coming six months, there was no prospect of new stagnation or even recession."
   
The undercurrent remained firm, he said.
   
"And that may act as a shield for the eurozone recovery overall," Schulz said.
   
ZEW also calculates a sentiment index for the eurozone as a whole and that slipped only slightly by 0.3 points to 61.2 points in April.
   
ING DiBa economist Carsten Brzeski said "the geopolitical conflict close to Germany's backyard, concerns about the Chinese economy and the recent equity market correction have clearly dented investors' optimism."
   
After the excellent start to the year, the German economy was now starting to feel some headwinds, Brzeski said.
   
"More and more gusts of wind, particularly from the East, could easily disturb real spring fever on the island of happiness," Brzeski warned.
   
Capital Economics economist Jonathan Loynes found the ZEW survey "brought further evidence of strength in the German economy. But the fall in expectations raises some concerns …over the sustainability of the recovery further 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.

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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