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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?
Carl-Johan Dalgaard, 'chief wise man' in the Danish Economic Councils. Photo: Liselotte Sabroe / Ritzau Scanpix

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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Denmark has the lowest inflation in the EU

Inflation is lower in Denmark than in any other EU country, according to new data from national agency Statistics Denmark.

Denmark has the lowest inflation in the EU

The statistics agency published on Friday its latest EU-harmonised consumer price index. The figures show an annual inflation of 2.3 percent in Denmark, which represents a fall from 3.2 percent in July.

Both figures are well below the latest figure for inflation across the EU, which is 5.9 percent.

That makes Denmark “the European champions of low inflation,” according to Allan Sørensen, the senior economist with the Confederation of Danish Industry (DI).

“Inflation is slowly moving downwards all across Europe. But there is currently no one who can welcome such low inflation as Danes. Inflation in the eurozone is more than five percent,” Sørensen said in a written comment.

While the inflation index shows a positive trend in Denmark, the opposite is true for Hungary, which has inflation of 14.2 percent.

The price of gas and summer house rentals are helping to bring the country’s EU-comparable inflation rate down.

Economist in Denmark say there is still work to do to reduce core inflation, a measure that does not take into account energy and unprocessed food prices and demonstrates the presence of inflation in other parts of the economy.

Core inflation in Denmark was 4.6 percent in August and 5.7 in July.

The reduction in this metric is also “positive”, economist Brian Friis Helmer of Arbejdernes Landsbank said.

But he added in a written comment that core inflation “can still be found at a much-too-high level”.

The Danish central bank, Nationalbanken, last week said inflation would continue this year and next and urged politicians to practice cautious economic policy.

READ ALSO: Danish central bank urges political caution over inflation

Denmark does not have a specific inflation target, but the European Central Bank has set its target for inflation at 2 percent.

The EU-harmonised inflation index is calculated in a way that makes data from the different countries comparable. That means the figures given for Denmark may be different from other inflation rates previously published.