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ECONOMY

‘Wise men’ of the German economy have spoken – and it’s good news (largely)

Germany's council of economic experts on Wednesday sharply lifted growth forecasts for 2017 and 2018, but warned that an incoming government has much to do to future-proof the economy.

Published: 8 November 2017 15:22 CET
'Wise men' of the German economy have spoken - and it's good news (largely)
The "wise men" (and women) - and women - of the council of economic experts. Photo: DPA

Europe's largest economy should expand by 2.0 percent this year and 2.2 percent in 2018, the five so-called “wise men” – who number one woman among them – predicted in a 460-page report.

That was a substantial upgrade from their March forecast of 1.4-percent growth this year and 1.6 percent next year.

“The German economy is in a powerful upturn,” they wrote, so much so that it could be in danger of “overheating”, or growing at a pace faster than it will be able to maintain for the long term.

But strong growth for now offers plenty of options for an incoming government to modernise Europe's powerhouse, they added.

Chancellor Angela Merkel's conservatives are locked in talks with the liberal Free Democrats and the ecologist Greens to forge an untested three-way coalition following elections in September.

The economists advised leaders to reduce public debt, dismantle or lower some taxes, especially for the middle classes, and create an “innovation-friendly” environment for the digital economy.

A “solidarity surcharge” introduced to help pay for German reunification after 1990 should be abolished, they argued, backing a pet cause for the liberals.

They also warned that “one can already identify a shortage of skilled workers in some areas,” a risk that will grow as Germany's baby-boomer generation heads for retirement in the coming years.

Politicians can partly fend off the problem by making it easier to combine work and family life, improving education and training and making it easier for companies to hire people from abroad with urgently-needed skills, the experts said.

“Different parties each see the advice in their own way,” Chancellor Angela Merkel said as she accepted her copy of the report from its authors in Berlin.

Implementing the experts' counsel “isn't always as simple politically as it is obvious economically… we have to find the right balance” between growth-friendly tax cuts and fiscal prudence, she said.

Defy Trump, cushion Brexit

Beyond Germany's borders, the report called for leaders to “decisively confront” protectionism in international trade that has taken centre stage since the US election of Donald Trump.

“Exhausting the remaining potential of liberalising trade could bring further increases in prosperity,” the experts argued, urging Washington and Brussels to resume stalled talks for a transatlantic trade deal known as TTIP.

Within the European Union, “momentum from France's President [Emmanuel] Macron can give the federal government a tailwind to drive integration forward together,” the report said.

The authors argued leaders should reform rules designed to steady member states' finances and buttress the bloc's internal market, especially with new initiatives for an EU-wide level playing field in the banking sector and capital markets.

The experts still hope Britain's departure from the EU can be stopped, but pressed for an agreement “that would minimise damage for both sides” if it goes ahead.

“Negotiating such a deal would likely take longer than the two years provided for in Article 50” of the EU treaty, they noted, suggesting a “one-off extension” of the deadline to ease talks.

Nevertheless, the EU's so-called “four freedoms” – of movement of capital, people, goods and services — are “essential”, they added, ruling out “cherry-picking” from London.

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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.

Published: 30 May 2023 15:46 CEST
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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