Summary

In many respects the Danish economy has performed well in recent years. In a European context the positive development is remarkable. Employment is rising, inflation is stable and government finances show a surplus. Nonetheless, the danger signals are becoming more apparent: capacity utilization is high, wage growth is still excessive and the balance of payments is weakened. This imposes more stringent requirements on economic policy.

In 1997 wages increased at the same rate of 4 per cent as in previous years. However, the unchanged rate of increase has diminished competitiveness in relation to the core countries of the EU, where wage increases have fallen to 2 per cent. Unemployment has declined strongly to 71/2 per cent of the labour force and is low compared to the other EU member states. Despite the structural-policy-related improvements the labour market has become tighter in 1997.

The current-account surplus is estimated at kr. 6 billion in 1997, which is one third of the surplus in 1996. The strong decline is especially a consequence of stronger growth in domestic demand in Denmark than in the most important trading-partner countries. In particular, private consumption has risen strongly, which is related to the increase in the value of the housing stock. Since 1993 prices for owner-occupied homes have risen by 50 per cent.

The decline in the current-account surplus reflects that in 1997 the Danish economy has drawn closer to full capacity utilization. A further upswing in domestic demand and an expansion of market opportunities abroad are expected in 1998, in view of the continuing favourable prospects for the international economy, although the problems faced by the economies in Southeast Asia give rise to uncertainty concerning growth. Capacity pressure on the labour market and capital stock may therefore increase at an untenable rate and the risk of a current-account deficit is considerable.

In 1997 the general-government budget showed a surplus for the first time since 1988. This improvement is due particularly to the positive economic development. In a situation with a prolonged economic upswing and low unemployment a small surplus is not sufficient to stabilize the development. It is important to use the favourable cyclical position to further consolidate public finances.

During the period since mid-1995 the financial conditions have had an expansive impact on the Danish economy, without being offset by an equivalently tight fiscal policy. Monetary policy is designed to maintain a stable krone rate, and it is therefore up to other elements of economic policy, primarily fiscal policy, to stabilize the general development in the economy. In recent years fiscal-policy tightenings have tended to fade out during the year in relation to the Finance Act. Some of the measures adopted to tighten fiscal policy in 1998 are temporary and it is therefore necessary that a tight fiscal stance is realized in 1998 and continued in 1999.

Denmark's substantial foreign debt means that a considerable proportion of output is devoted to interest payments. This also makes Denmark vulnerable in the event of unrest on the capital markets. The shift in the age composition of the population means that there will be relatively more consumers and relatively fewer producers in the future. For this reason it is desirable to eliminate the debt within the foreseeable future. Achieving this will require higher private savings.

After a period of one and a half years with a discount rate at the lowest level since the 1930s the Nationalbank, like the central banks of the other core countries in the EU, raised the official interest rates on October 9, 1997. The discount rate was raised by 1/4 per cent to 31/2 per cent. The Danish/German interest-rate differential narrowed to 0.4 per cent during the year.

Long-term interest rates decreased in both the USA and Germany and the yield differentials to Germany of most European countries narrowed to below 1/2 per cent. In Denmark the yield differential fell to 0.3 per cent at the beginning of 1998. Long-term bond yields are at their lowest level since around 1960. This indicates that expectations of continuing low inflation are becoming firmer. Inflation was 2.2 per cent for 1997, approximately the same rate as the year before. Inflation was slightly higher in Denmark than in most other EU member states.

The Nationalbank has purchased and sold foreign exchange in order to dampen the day-to-day fluctuations in the krone rate and to stabilize the krone close to the central rate against the D-mark. Net foreign-exchange purchases entailed an increase in the foreign-exchange reserve of kr. 45 billion to kr. 130 billion at the close of the year.

The objective of the foreign-exchange policy is to maintain a stable krone rate against the core EMS currencies. In 1997 the krone was close to the central rate against the D-mark and was more stable than ever before within the EU exchange-rate system. The fixed-exchange-rate policy is the framework for the stability-oriented policy pursued in Denmark. The other EMS currencies were also very stable and close to the central rates. The dollar and pound sterling strengthened against both the D-mark and the yen in 1997. The development in exchange rates entailed a weakening of the effective krone rate by 2 per cent, although the weakening was offset by the depreciation of the Asian currencies, which are not included in the calculation.

In 1997 and at the beginning of 1998 a number of the currencies of Southeast Asia weakened very considerably. The foreign-exchange unrest spread to the share markets and led to a very strong downturn in the economies of the region. In order to solve the countries' acute international financing problem several major loan packages were agreed under the auspices of the IMF. This support is designed to curtail the effects of the turbulence in Asia, to prevent it from spreading to the rest of the world.

The banks' overall result for the year was kr. 13 billion, the same level as the previous year. Provisions and losses on debtors fell for the fifth consecutive year. The overall result for the year of the mortgage-credit institutes was kr. 71/2 billion. Provisions carried back by the mortgage-credit institutes exceeded their new losses and provisions.

The preparations for the third stage of Economic and Monetary Union, EMU, are approaching completion. The selection of participants in the monetary union will take place at the beginning of May 1998, after which the European Monetary Institute, EMI, will be restructured as the European Central Bank, ECB.

The introduction of the single currency - the euro - in most EU member states on January 1, 1999 will not in reality lead to any change in Denmark's exchange-rate policy. As a natural continuation of the present policy the objective will be to maintain a stable krone rate against the euro, within the framework of the new exchange-rate mechanism, ERM2.

In 1997 the Nationalbank issued the first two banknotes in the new note series, the 200-krone note on March 10 and the 500-krone note on September 12. New developments in reproduction technology have made it necessary to improve the security features to protect the notes against counterfeiting.

In cooperation with the Crime Prevention Council the Nationalbank in September 1997 conducted a campaign directed at children and young people in order to warn them against experimenting with counterfeit money.

As from 1998 the financial statistics have been expanded. The Nationalbank's publications in the "Nyt" ("News") series, published approximately 130 times per year, and the "Monthly Financial Statistics" may be received on a subscription basis.

As from spring 1998 the Nationalbank's Internet home page will be launched at the address: http://www.nationalbanken.dk.

The Nationalbank's accounts for 1997 show a profit of kr. 5.6 billion, which is slightly less than in 1996. An amount of kr. 1.0 billion - corresponding to the value adjustments - is allocated to the Value Adjustment Reserve, and kr. 1.4 billion - equivalent to 30 per cent of the profit before value adjustments - to the General Reserves. The remainder of kr. 3.2 billion is payable to the central government.