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ECONOMY

German inflation lowest since October 2009

Inflation in Germany, Europe's biggest economy, slowed to just 0.2 percent in December, its lowest level in more than five years, and averaged 0.9 percent for the whole of 2014, according to new figures released on Monday.

German inflation lowest since October 2009
Monday's low inflation figures could spark fears of deflation Photo: DPA

In a preliminary flash estimate, the federal statistics office Destatis calculated that German inflation stood at just 0.2 percent year-on-year last month, down from 0.6 percent in November.

The last time inflation in Germany was lower than 0.2 percent was in October 2009.

Taking 2014 as a whole, inflation stood at an annual average 0.9 percent, Destatis calculated.

The flash estimate is based on consumer price data for six key German states. Final data on the basis of all 16 German states is scheduled to be released on January 16.

Using the Harmonised Index of Consumer Prices (HICP) — the yardstick used by the European Central Bank — inflation in Germany was even lower at 0.1 percent in December, way under the ECB's annual inflation target of just below 2.0 percent.

The chronically low level of inflation across the single currency bloc has fuelled concern the region could slip into deflation — a sustained and widespread drop in prices that hampers economic activity and could lead to job losses.

While falling prices may sound good for consumers, deflation can trigger a vicious spiral in which businesses and households delay purchases, throttling demand and causing companies to lay off workers.

Such concerns have persuaded the ECB to cut interest rates to a new all-time low and roll out other anti-deflation measures such as a series of asset purchase programmes to inject cash into the economy.

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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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