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French economy hit by negative inflation

UPDATED: France saw negative inflation in January, according to new data released on Thursday. It's the first time in five years that prices have declined.

Published: 19 February 2015 08:59 CET

French economy hit by negative inflation

Winter sales in Paris. Photo: AFP

Inflation in France, the eurozone's second-biggest economy, was negative in January for the first time in more than five years, the national statistics agency said on Thursday.

Prices declined by 0.4 percent in January compared to the same month last year, INSEE said, noting that France has not seen negative inflation since October 2009.

The data in France followed similar figures earlier this month that showed prices in European powerhouse Germany also declining by 0.4 percent.

The pattern of declining prices in the eurozone is creating a headache for the European Central Bank, which aims to keep inflation "close to, but below" two percent.

Last month, the ECB unveiled a massive trillion-euro bond purchase programme to ward off deflation and end stagnation in the eurozone economy.

The fall in inflation in the eurozone is linked to the dramatic fall in oil prices, resulting in cheaper petrol — a key component of many households' spending.

But it is also linked to a sluggish economy in the 19-nation zone, with weak demand.

Falling prices sounds like it should be positive for consumers and the economy.

But economists fear deflation almost as much as rampant inflation because shoppers tend to put off purchases in the belief they may be cheaper in the future.

This leads to a spiral of ever weaker demand, slowing the economy and pushing up unemployment.

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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