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Chance of more QE peps Dax, troubles economists

The European Central Bank (ECB) announced Thursday that it may continue buying eurozone governments' bonds into 2016, hoping to free up banks' cash to invest in business. The German stock market reacted excitedly – but economists aren't convinced.

Published: 22 October 2015 16:00 CEST

Chance of more QE peps Dax, troubles economists

The Euro symbol seen through ECB President Mario Draghi's glasses. Photo: DPA

Shortly after ECB President Mario Draghi announced on Thursday that “the council of the ECB is ready and willing to take action, and will use all its tools,” the Dax index of Germany's biggest companies jumped 1.55 percent to 10,396.66 points.

Investors had been keenly watching the ECB decision, with some worrying that the bank wouldn't continue policies aimed at keeping the European economy more liquid.

But some German economic observers warned that the ECB could never by itself ensure economic growth.

“It will never be enough for the markets. For the real economy, continuing the present bond-buying programme will have little effect,” said Carsten Brezski, chief economist at ING Diba.

“This looks much more like a desperate measure.”

And Professor Stefan Kooths of the Kiel Institute for the Global Economy (IW) warned in a statement that the ECB keeping interest rates low presented its own dangers.

“The risks of zero-interest policies are becoming greater with every month. Low returns are driving investors to more and more risky bets, there is a threat of systematic bad investments,” Kooths said.

“The policy of ultra-cheap money is contributing little to overcoming the Euro crisis, which continues to smoulder – the problem is being put off, not resolved.”

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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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