15 March 2023
A tight economic policy is required to bring down inflation. Monetary policy has already been tightened significantly and further tightening is expected. But the government should be ready to tighten fiscal policy if the risk of an independent Danish wage-price spiral rises further.
This is the conclusion reached by Danmarks Nationalbank in a new analysis of the Danish economy, which points out that inflation will fall significantly this year, but high wage increases may delay the timing of the required reduction in inflation.
"Denmark and the entire euro area face the same challenges in terms of bringing down inflation. Both are facing outlook for high wage increases, but sustained wage increases of this size are not compatible with low and stable inflation in the long term," says Governor Christian Kettel Thomsen.
Danmarks Nationalbank expects inflation to fall to 4.0 per cent this year from 8.5 per cent last year. In 2024 and 2025, inflation is projected to reach 3.6 per cent and 3.0 per cent, respectively. The expected fall in inflation this year can be attributed primarily to declining energy prices.
"There is no room to increase the pressure in the Danish economy". It may be necessary to tighten fiscal policy if risk of an independent Danish wage-price spiral rises further," says Christian Kettel Thomsen.
In a new projection for the Danish economy, Danmarks Nationalbank expects the gross domestic product, GDP, to grow by 0.9 per cent this year, 1.2 per cent in 2024 and 1.2 per cent in 2025. Growth this year, however, reflects a significant boost from production in the pharmaceutical industry, which is not expected to increase employment or capacity pressure in the economy. Disregarding this increase, a small fall in GDP in Denmark through 2023 is expected as the effect of the central banks' interest rate increases and dampens growth in Denmark and abroad.
Enquiries can be directed to press advisor Ole Mikkelsen on tel. +45 3363 6027.