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ECONOMY

Moody’s backs Spain’s ‘improving’ economy

Credit rating agency Moody's said on Tuesday that Spain is "now firmly on an improving trend" with exports boosting the eurozone's fourth-biggest economy as it crawls out of recession.

Moody's backs Spain's 'improving' economy
Spain's public finances are said to be "on a gradually improving trend" but "still comparatively weak". Photo: Grumo/Flickr

"While exports continue to be the main driver of growth, the rating agency also expects domestic demand to contribute positively to growth from this year onwards," Moody's Investors Service said in a report.

Prime Minister Mariano Rajoy's conservative government has fought to stabilize the public finances by raising taxes, freezing public salaries and curbing spending despite angry street protests.

It says its painful reforms are delivering results after the economy emerged gingerly in mid-2013 from its second recession in five years, following the collapse of a construction boom in 2008.

Growth remains slow, however, and the unemployment rate still tops 26 per cent.

Moody's raised Spain's sovereign credit rating, a key measure of financial and economic health, by one notch in February to Baa2, indicating it is creditworthy but vulnerable to economic shocks.

Moody's also assigned Spain a positive outlook in that upgrade and praised its banking sector overhaul and structural reforms, which include looser hiring and firing laws that sparked large demonstrations.

Spain's public finances are "on a gradually improving trend" but "still comparatively weak with high budget deficits and a rising public debt burden until after the middle of the decade", Moody's said on Tuesday.

The government says Spain's public deficit fell to 6.62 per cent of gross domestic product in 2013 from 6.84 per cent the year before, just shy of the 6.5-per cent target agreed with European authorities.

Spain's public debt reached a record of 93.9 per cent of gross domestic product in 2013.

"The elevated budget deficit and the resulting continuing upward trend in the public debt ratio remain Spain's main credit weakness," Moody's warned.

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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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