Danish Central Bank Expects Economy to Contract Next Year

(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 by 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 the 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 jumped 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, following 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 parentheses are previous forecasts from March.

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