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ECONOMY

‘We need to stand up to crisis’: Germany warns of recession

The German economy could enter a recession in the third quarter, the Bundesbank warned Monday, as the debate on government measures to support the economy swelled in Berlin.

Published: 19 August 2019 14:53 CEST
'We need to stand up to crisis': Germany warns of recession
Euro notes. Photo: DPA

 “The economy could contract again slightly” this summer, Germany's central bank said in its monthly report, following a 0.1-percent decline in gross domestic product (GDP) in the second quarter.

“According to data currently available, industrial production is expected to shrink markedly in the current quarter as well.”

READ ALSO: German economy is 'down on its knees': Is a recession looming?

Having seen a decline in trade against the backdrop of the US-China trade war, two of its main customers, Europe's biggest economy will enter what it technically defines as a recession should its GDP shrink further.

Alarmist signals are reviving the political debate between those who support the German government's dogma of balanced budgets and those seeking more flexibility in order to revive the economy.

Germany can afford it on paper after five consecutive years of budget surpluses and interest rates for long-term loans that are extremely attractive to the federal government.

As US-China tensions intensify, economists have urged Germany to fork out cash to avoid a recession, but Chancellor Angela Merkel's government has previously said things were not yet bad enough to warrant loosening the purse strings.


A BMW plant in Leipzig. Germany's auto industry comprises a sizeable chunk of its export market. Photo: DPA

Balanced budget

Citing anonymous sources, Der Spiegel news magazine said Friday that the government “had no intention of continuing to set aside money in the event of a recession”.

That would mean abandoning the so-called “black zero” doctrine committing the German state to a balanced budget.

On Sunday, German Finance Minister Olaf Scholz hinted at a potential intervention, stating that Germany could “fully face up to” a new economic crisis.

“It is sometimes important, when things change completely, for example, for us to have enough strength to react,” he said during an open house day at government offices.

“If we have debt in Germany that is less than 60 percent of our GDP, that is the strength we need to stand up to a crisis,” he added.

Scholz pointed to the estimated €50 billion that the 2008-09 financial crisis had cost the German government.

After the financial crisis and until 2013, there were negative figures to represent the difference between Germany's income and expenditure. Graphic: DPA

“We have to be able to muster that and we can muster that — that's the good news.”

In particular, several Social Democrats, junior partners in Merkel's coalition government, want Germany to draw on its reserves to finance a plan to combat global warming or infrastructure works.

Flexibility instruments could enable Berlin to draw on its large budget surplus of 1.7 percent of its GDP as early as September.

Merkel's conservatives have so far resisted and abandoning the popular balanced budget stance seems unlikely with major regional elections looming in September and October.

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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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