Denmark’s economy is set to contract in 2023 due to rising inflation and weaker economic growth, according to the central bank’s latest analysis.
In its latest report, the central bank states: “Increasing interest rates and reduced household purchasing power dampen the economy in Denmark and abroad. Last year saw a strong recovery, leading to a tight Danish labour market, but prospects are for considerably weaker growth in the coming years.”
The central bank blames rises in energy prices, inflation and interest rates for the negative outlook.
It is also a different message to the one put out by the central bank the previous month, when it stated that the economy had avoided a recession due to faster-than-expected growth in the second quarter and a strong job market.
As a result of its latest analysis, the central bank has called on the government to use fiscal policy as a way to dampen inflation and to lower the risk of a “self-reinforcing wage-price spiral” caused by high capacity pressures and low unemployment.
“Danmarks Nationalbank recommends that fiscal policy helps relieve capacity pressures by close to 1% of GDP in 2023, beyond what the proposal for the 2023 Finance Bill suggests,” it stated.
Nor is the central bank alone in foreseeing a potential recession in 2023.
Independent economic advisory group Oxford Economics has downgraded Denmark’s GDP growth prospects.
“We now expect Denmark to enter a shallow recession in Q3 this year, ending in Q1 2023, due to rising energy costs, exhausted reopening tailwinds and tightening financial conditions,” it states in its latest report.
“We have cut our GDP growth forecasts by 1.2ppts to 2.3% in 2022 and by 0.7ppts to 0.5% in 2023. Beyond 2023, it will take several years for GDP to return to our previous baseline.”
The gloomy forecasts come at a time when Denmark is looking for a new head of its central bank after current governor Lars Rohde said he would step down in January 2023.
Rohde was appointed in February 2013, when inflation was far from its currently soaring levels.
Just six months previously, Denmark became the first country to impose negative interest rates, a step that was subsequently followed by other central banks in Europe as a means to generate more consumer spending.
Ten years on and Rohde is stepping down amid a very different economic background, with inflation nearing double-digit figures and 40-year highs across Europe.
Somewhat fittingly, Rohde’s retirement was announced at the same time that the central bank ended its negative rates policy, raising its benchmark interest rate by 75 basis points from -0.10% to 0.65% on 9 September.
The rate rise came hours after the European Central Bank increased its benchmark deposit rate by 75 basis points, and the Danish central bank stated the ECB’s move was the main reason for its own rate rise.
The end to negative interest rates was welcomed by analysts. Palle Sorenson, chief economist at Nykredit Bank, wrote in a research note: “The interest rate rise is generally desirable for the Danish economy, which continues to balance on the edge of overheating.”
No announcement has yet been made as to who will replace Rohde, however Reuters refers to two of his current deputies, Signe Krogstrup and Per Callesen, as possible replacements.
In a statement, Rohde paid tribute to his colleagues. “I have greatly appreciated the cooperation that has been with authorities and changing governments, as well as… the ongoing dialogue with the financial sector,” he said in a statement.