2008-12-18/Denmark in two-year economic recession
By Michael de Laine, Copenhagen, 18th December 2008
Denmark’s economy will definitely decline in 2008 and 2009 and will see only weak growth in 2010, says Jyske Bank. Inflation will fall but unemployment will rise, and some relaxation of fiscal policy is desirable in 2009.
Denmark’s economy is in an historic fall, Jyske Bank said in its analysis of the country’s economy in the fourth quarter of 2008.
The intensified crisis on the financial markets has become so persistent and so broad-based that it now has a considerable negative impact on the overall economy. There is now a picture of a definite decline for Denmark’s economy in 2008 and 2009 and only weak growth in 2010, the bank said. We must look back to the 1980s to see periods with a similar recession.
The prospects for Denmark’s economic development are the darkest for many years. The crisis on the financial markets escalated in mid-September and it is now clear that this will exacerbate the economic development considerably, Jyske Bank said.
Large interest rate cuts at central banks and large falls in raw materials prices can reduce the effects of a serious economic decline but cannot prevent it.
Because it comes at a time of high activity, the economic recession will be quite hard, the bank said.
With falling house prices, a very large number of bankruptcies, confidence indicators at their lowest levels and, not least, the prospect of an historically large recession in the economy the words ‘economic crisis’ spring to mind, Jyske Bank said.
On the other hand, there is continued reason to emphasise the Danish economy’s strong starting position with very low unemployment. And with tax cuts, falls in interest rates and high pay increases, many people will actually find they will have more money in their hands next year. It is worth remembering this in a situation where collective economic caution among consumers can take the upper hand.
Jyske Bank expects Denmark’s gross national product (GNP) to fall by 0.3% in 2008 and by 0.8% in 2009 (representing cuts of 1.0% and 1.3% respective in its previous estimates), followed by a slight rise of 0.2% in 2010.
While the annual inflation rate reached 4.3% in August - the highest level in 19 years - price developments have now turned. Falling fuel prices in particular are pulling inflation downwards, but the high rises in food prices are now behind us, which also plays a considerable role, the bank said.
Apart from the raw materials price falls, the economic recession also implies a slower development in prices. We expect the annual inflation rate will bottom at about 1% in the summer of 2009. Consumers can thus look forward to a large increase in real earnings next year.
On an annual basis, we expect inflation to be 3.4% in 2008, 1.5% in 2009 and 2.0% in 2010, the bank said.
Jyske Bank expects unemployment to rise from the present level of almost 50,000 to 125,000 at the end of 2010. To keep unemployment under control, Jyske Bank said it would be suitable with a further relaxation of fiscal policy during 2009.