(Bloomberg) — Denmark’s central bank slashed its outlook for the Nordic nation’s economy and now sees a contraction next year as spending is dented by rising inflation and borrowing costs.
Nationalbanken expects gross domestic product to shrink 0.1% in 2023, it said on Wednesday. It sees a rebound of 1.2% the following year. That compares with the bank’s previous forecast of 2.1% growth in the next two years.
The central bank is among the first forecasters to predict an outright contraction in the Danish economy that was among the best in the rich world in weathering the effects of the pandemic thanks to its strong labor market. Svenska Handelsbanken earlier on Wednesday forecast a 0.7%-decline for next year, while Nordea this month estimated the economy to grow 0.5% in 2023 and finance ministry sees 0.8%-expansion.
Rising interest rates and higher inflation will result in “considerably” lower growth in the coming years, the bank said. Governor Lars Rohde called on the Danish government to tighten fiscal policy in its 2023 budget plan and to reduce demand as quickly as possible to avoid a “self-reinforcing wage-price spiral.”
“We might as well prepare for a period of weakened activity and declining employment,” Rohde said in a statement. “It is important to curb the very high inflation. This requires significant economic policy tightening, regrettably something that everyone will feel -– citizens and companies alike.”
As energy and food prices have jump globally, Denmark’s consumer prices rose 8.9% in August, the highest annual inflation rate in four decades. Consumer confidence has in recent months been at the lowest level since the 1970s.
Denmark, which ties the krone to the euro, earlier this month raised interest rates, tracking the European Central Bank, to end its era of negative interest that lasted almost a decade. Rohde, the governor, also this month said he will retire early next year.
Nationalbanken’s September Forecasts
Note: Numbers in parenthesis are previous forecasts from March.
(Adds more comments, details from third paragraph)
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The World Economy Is Slowing More Than Expected, a New Forecast Shows – The New York Times
Economies around the world are slowing more than expected, as Russia’s war in Ukraine drives inflation and the cost of energy higher, forcing the Organization for Economic Cooperation and Development on Monday to scale back its projections for growth in the coming years.
Although it shied away from forecasting a global recession, the organization downgraded its outlook, maintaining its expectation that global economic growth would be a “modest” 3 percent this year, and an even weaker 2.2 percent next year, down from 2.8 percent a few months ago.
“The world is paying a very heavy price for Russia’s war of aggression against Ukraine,” said Mathias Cormann, the organization’s secretary general.
The organization lowered its growth forecast in virtually all of the 38 countries it represents, which include most of the word’s advanced economies. It projected growth of just 3.2 percent for China for this year and 4.7 percent for next year, one of the lowest rates for the country since the 1970s, said Álvaro Santos Pereira, the O.E.C.D.’s chief economist.
Comparing its current projection with one issued at the end of last year, a gap of about $2.8 trillion in foregone output for 2023 emerged, a figure that is roughly the size of the French economy. That represented the organization’s rough estimate of the economic toll the war is taking on the global economy.
“The global economy has lost momentum in the wake of Russia’s war of aggression in Ukraine, which is dragging down growth and putting additional upward pressure on inflation worldwide,” the report said.
Europe remains the most vulnerable region, with several countries facing the threat of a recession. Germany, the European Union’s largest economy, is projected to contract by 0.7 percent next year, after growing only 1.2 percent this year. Both France and Italy are forecast to see growth of less than 1 percent next year.
In the United States, projected growth was scaled back to 1.5 percent this year, from 2.5 percent forecast in June, and to 0.5 percent in 2023, down from 1.2 percent in the June report.
Soaring inflation, fueled by the high price of energy and food, is driving the slowdown and spreading to other goods and services, weighing heavily on households and businesses. The high cost of energy and the threat of gas shortages in Europe remain key risks, as countries head into winter with storage tanks nearly full, but with uncertainty about how long they will last.
“The risks are very much tilted to the downside,” Mr. Cormann warned.
The world economy has an ominous August 2007 kind of feeling – Axios
August 2007 was, on the surface, a fine month for the U.S. and global economy. Unemployment was low. The stock market had a few bumpy days, but nothing too dramatic.
Why it matters: Many consider it to be the beginning of what we now call the global financial crisis. And there are some ominous parallels with what the world is experiencing right now.
- To be clear, we’re not predicting a new crisis as severe as the one that rocked the world in 2008. Rather, we’re arguing that major (and accelerating) underlying shifts are underway and likely to reverberate for years.
- How significant the pain will be is hard to predict. It could vary significantly across countries and industries. It’s plausible that the economic damage in most sectors of the U.S. economy will be mild.
In this parallel, the tumult in Britain — where the currency and government bond prices are plunging — is the equivalent of when French bank BNP Paribas experienced funding problems due to mortgage losses.
- The bank required a liquidity lifeline from the European Central Bank on Aug. 9, 2007, which many date as the beginning of the global financial crisis.
- As it was then, the U.S. economy remains strong, and the financial disruptions across the Atlantic seem remote. But in that episode, they were in fact early manifestations of profound adjustments that were only beginning, and would eventually affect economies worldwide.
State of play: For a decade-plus after the 2008 crisis, the world was stuck in a low-interest rate, low-inflation, low-growth rut.
- Central banks searched for novel ways to loosen monetary policy to stimulate demand, including negative interest rates and quantitative easing.
- They concluded that the “neutral rate” of interest had become much lower, due to seismic forces like demographics and globalization.
- The widespread view — reflected in bond prices and officials’ comments — was that after the pandemic’s disruptions passed, this low-rate normal would return. Until recently, at least.
What’s happened in the last few months — and with dizzying speed in the last several days — is that markets are adjusting to the possibility that the era of extremely low rates and liquidity is over, and the 2020s will be very different from the 2010s.
- Consider that at the start of the year, a 30-year U.S. Treasury bond yielded 1.92%. That’s up to 3.62% as of 10:45am EDT this morning.
- The effects of that repricing are only beginning to ripple through the economy. It’s most visible now in housing, but could eventually affect everything from the sustainability of large budget deficits to the viability of any business relying on lots of leverage.
Flashback: Donald Kohn, who played a key role in fighting the global financial crisis as the No. 2 official at the Fed, had some prescient comments last year.
- “It’s possible that [the natural rate of interest] is higher than backward-looking models now suggest,” he said at the 2021 Jackson Hole symposium, noting loose fiscal policy and pent-up savings.
- “But the transition to a higher rate environment could be pretty bumpy given that a lot of asset values and assessments of debt sustainability are built on very low interest rates for very long.”
What they’re saying: In a note out this morning, Joseph Brusuelas, chief economist at RSM, said that dollar funding markets have shown some of the strains they have in crises past (though not as severe.).
- He writes that it is likely economies that have been “characterized by insufficient aggregate demand and low inflation over the past two decades, will now be characterized by insufficient aggregate supply, negative supply shocks, geopolitical tensions and higher inflation,” which require different monetary and fiscal policies.
- “Fixed income markets are signaling a shift in perceptions of financial stability and raising a caution flag for investors,” he added.
The bottom line: We’re in the early days of seeing how a world of tighter money will play out across sovereign nations, real estate, the corporate sector and more.
Energy, inflation crises risk pushing big economies into recession, OECD says – Reuters
PARIS, Sept 26 (Reuters) – Global economic growth is slowing more than was forecast a few months ago in the wake of Russia’s invasion of Ukraine, as energy and inflation crises risk snowballing into recessions in major economies, the OECD said on Monday.
While global growth this year was still expected at 3.0%, it is now projected to slow to 2.2% in 2023, revised down from a forecast in June of 2.8%, the Organisation for Economic Cooperation and Development said.
The Paris-based policy forum was particularly pessimistic about the outlook in Europe – the most directly exposed economy to the fallout from Russia’s war in Ukraine.
Global output next year is now projected to be $2.8 trillion lower than the OECD forecast before Russia attacked Ukraine – a loss of income worldwide equivalent in size to the French economy.
“The global economy has lost momentum in the wake of Russia’s unprovoked, unjustifiable and illegal war of aggression against Ukraine. GDP growth has stalled in many economies and economic indicators point to an extended slowdown,” OECD Secretary-General Mathias Cormann said in a statement.
The OECD projected euro zone economic growth would slow from 3.1% this year to only 0.3% in 2023, which implies the 19-nation shared currency bloc would spend at least part of the year in a recession, defined as two straight quarters of contraction.
That marked a dramatic downgrade from the OECD’s last economic outlook in June, when it had forecast the euro zone’s economy would grow 1.6% next year.
The OECD was particularly gloomy about Germany’s Russian-gas dependent economy, forecasting it would contract 0.7% next year, slashed from a June estimate for 1.7% growth.
The OECD warned that further disruptions to energy supplies would hit growth and boost inflation, especially in Europe where they could knock activity back another 1.25 percentage points and boost inflation by 1.5 percentage points, pushing many countries into recession for the full year of 2023.
“Monetary policy will need to continue to tighten in most major economies to tame inflation durably,” Cormann told a news conference, adding that targeted fiscal stimulus from governments was also key to restoring consumer and business confidence.
“It’s critical that monetary and fiscal policy work hand in hand”, he said.
Though far less dependent on imported energy than Europe, the United States was seen skidding into a downturn as the U.S. Federal Reserve jacks up interest rates to get a handle on inflation.
The OECD forecast that the world’s biggest economy would slow from 1.5% growth this year to only 0.5% next year, down from June forecasts for 2.5% in 2022 and 1.2% in 2023.
Meanwhile, China’s strict measures to control the spread of COVID-19 this year meant that its economy was set to grow only 3.2% this year and 4.7% next year, whereas the OECD had previously expected 4.4% in 2022 and 4.9% in 2023.
Despite the fast deteriorating outlook for major economies, the OECD said further rate hikes were needed to fight inflation, forecasting most major central banks’ policy rates would top 4% next year.
With many governments increasing support packages to help households and businesses cope with high inflation, the OECD said such measures should target those most in need and be temporary to keep down their cost and not further burden high post-COVID debts.
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