The Danish economy is experiencing a slowdown, largely as a result of interest rate increases, which are having an impact on consumption. The slowdown is expected to ease pressure on the labour market and bring the Danish economy to a neutral cyclical situation by the end of this year, according to the report ‘Outlook For the Danish Economy’ by Danmarks Nationalbank.

Inflation will decrease significantly due to falling energy prices, but higher wage increases could cause inflation to remain high. Although the risk of inflation taking hold has not been averted, it is essential to bring down the high inflation. As a result, a tight economic policy is required, and fiscal policy must not counteract monetary policy in reducing inflation.

The high inflation has prompted central banks across the world to tighten monetary policy, resulting in sharp market rate increases. Monetary policy is already dampening activity in Denmark and will further dampen growth and inflation over the coming year, as per Danmarks Nationalbank’s report.

In addition, consumption has declined as a result of a marked drop in purchasing power. However, growth has been supported by exports, but the growth is expected to slow down as higher interest rates dampen growth in Denmark’s export markets.

Although the slowdown is expected to lead to increasing unemployment, it will reduce pressure on the labour market. However, the risk of inflation taking hold in a Danish wage-price spiral remains, even though inflation is expected to decrease. Danmarks Nationalbank assesses that the risk of a Danish wage-price spiral has been reduced since the summer of 2022.

The outcome of the collective bargaining in the spring points to higher wage increases than those seen in collective bargaining rounds for the past many years. Although labour market pressures are easing, wage increases in the manufacturing industry are expected to increase to around 4.7 per cent in 2023.

Fibre2Fashion News Desk (DP)

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