21 September 2022
Gas, electricity and food prices have risen significantly. This is contributing to current inflation reaching a 40-year high in Denmark and many other places in the world. Inflation is expected to fall in 2023 but will remain high. Along with rising interest rates, this implies prospects of considerably lower growth in the coming years.
The very high inflation is driven by supply and demand having moved in opposite directions due to several global shocks related to covid-19 and accommodative economic policies. Most recently, the Russian invasion of Ukraine has intensified imbalances.
Danmarks Nationalbank's new projection for the Danish economy estimates that inflation will be 8.6 per cent this year, 4.3 per cent in 2023 and 1.7 per cent in 2024.
"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. If we don't get to grips with inflation, the cost to society will be even greater later on," says Governor Lars Rohde, Danmarks Nationalbank.
Overall, prospects are for a considerable slowdown in the Danish economy. The gross domestic product, GDP, is expected to increase by 2.0 per cent this year, while growth in 2023 and 2024 is forecast at -0.1 per cent and 1.2 per cent, respectively.
"We might as well prepare for a period of weakened activity and declining employment. But we should bear in mind that this is happening in Denmark after a very strong boom in the wake of the coronavirus pandemic, which has led to a very tight labour market," says Lars Rohde.
Denmark has lower unemployment and more pronounced labour shortages than most other European countries.
"The combination of strong labour market pressures, high demand and high inflation carries the risk of a self-reinforcing wage-price spiral in Denmark. That is why we find that fiscal policy needs to be tightened and demand reduced as quickly as possible. Even more than what the government's Finance Bill envisages," says Lars Rohde.
The government's proposal for the Finance Act for 2023 means a tightening of fiscal policy compared to this year. But there are still significant effects from the fiscal measures which in recent years have boosted demand. Danmarks Nationalbank recommends that fiscal policy contributes to reducing the capacity pressure by almost 1 per cent of GDP in 2023, in addition to what is in the Finance Bill.
Enquiries can be directed to press advisor Ole Mikkelsen on tel. +45 3363 6027.