Report and Accounts

The global upswing continued in 2004 with growth at the highest level for a number of years. At the start of 2005 there are prospects of continued robust growth. For the euro area, the strength of the upswing depends especially on whether private consumption picks up.

The Danish economy improved in 2004, with GDP growth at 2.0 per cent against 0.4 per cent in 2003. Domestic demand rose by 3,7 per cent and was broadly based on increases in both private consumption and investments. Housing prices rose by 8 per cent and helped to underpin private consumption. Imports of consumer goods also rose substantially, which contributed to a smaller current-account surplus than in 2003. The falling employment in recent years came to an end in 2004. This was partly attributable to an increase in subsidised employment.

There are prospects that the upswing in the Danish economy is continuing in 2005. The low interest rates and rising real incomes will continue to sustain private consumption and investments. Since growth in domestic demand in 2005 is likely to be higher than for Denmark's trading partners, the tendency for the current-account surplus to diminish will continue.

Inflation fell in 2004 despite rising oil prices. Wage increases diminished, but were still higher than in the euro area. Danish hourly wage costs are among the highest in the world, and in a future-oriented perspective globalisation will continue to make high demands on the innovation and adaptability of Danish enterprises if they are to remain competitive.

The economic upswing contributed to improving government finances, particularly via higher tax revenue. A major economic-policy challenge in the future is to handle the pressure on government finances as the population ages over the next decades. This requires a sustained increase in private-sector employment so as to ensure fiscal-policy scope when the demographically determined decline in the labour force begins to materialise. This increase in private-sector employment is not likely to be realised without structural-policy initiatives.

In June 2004, the Federal Reserve commenced a gradual normalisation of monetary policy. From June 2004 to February 2005 the fed funds target rate was raised on six occasions from 1.0 per cent to 2.5 per cent. The European Central Bank, ECB, maintained its interest rate at 2 per cent in 2004 in view of the moderate growth and subdued price development. The ECB's interest rate was last adjusted in June 2003.

In the USA, the 10-year yield was virtually unchanged for the year overall, while the corresponding yield in the euro area fell. The divergence was attributable among other factors to better growth prospects for the USA than for the euro area, as well as the prospect of further monetary-policy tightening in the USA. In Denmark the yield on the benchmark 10-year government bond matched the development in the euro area in 2004, ending the year at 3.8 per cent. The yield spread was more or less constant at approximately 25 basis points, but narrowed to approximately zero at the end of 2004 and the beginning of 2005.

The US dollar weakened against the euro, pound sterling and yen in the 2nd half of 2004 and reached the lowest level vis-à-vis the euro since 1999, when the euro was introduced. The background to the weakening included the increasing US balance-of-payments deficit.

In 2004 the krone was stable against the euro at a level slightly stronger than the central rate and minor interventions were only required on a few occasions. Danmarks Nationalbank has not adjusted its interest rates since June 2003, when the lending rate was reduced to 2.15 per cent in connection with the ECB's lowering of its interest rate. The discount rate was lowered at the same time and is now 2.00 per cent.

On 1 May 2004, 10 new countries joined the EU. Estonia, Lithuania and Slovenia were the first new EU member states to join ERM II in June 2004. The inclusion of the new currencies does not entail any changes in the terms for the Danish krone in ERM II. Proposals to amend the Stability and Growth Pact were submitted in 2004. Several member states, including Germany and France, exceeded the limit of 3 per cent of GDP for government budget deficits in 2004.

The banks increased their profits substantially in 2004, inter alia due to increased income from fees and commission as well as a continued reduction of losses and provisions. As in recent years, both banks and mortgage-credit institutes continued to develop new loan products for homeowners. The many different loan options require detailed advice to be provided to homeowners on how their finances are affected by the various types of loans, e.g. if interest rates change.

Danmarks Nationalbank marked the royal wedding in 2004 by issuing a commemorative coin in two versions: a 20-krone coin and a 200-krone coin. In the series of tower coins, two new coins were issued in 2004 and another in January 2005. The motifs are the Goose Tower in Vordingborg, Svaneke Water Tower and the tower of Landet Church on the island of Tåsinge. In March 2005 a Hans Christian Andersen coin is issued with a motif taken from The Ugly Duckling. The upgrading of the Danish banknote series continued in 2004 with the issue of a new, more secure 1,000-krone banknote.

In 2004, Danmarks Nationalbank held a seminar for the central banks of the new EU member states on ERM II, which these countries must join before they can adopt the euro. Denmark has long-standing experience of conducting economic policy under a fixed-exchange-rate regime. The purpose of the seminar was to share this experience with the central banks of the new EU member states.

In January 2005, Danish Ship Finance, the Danish Ministry of Economic and Business Affairs and Danmarks Nationalbank concluded an agreement on the restructuring of Danish Ship Finance as a limited liability company. The agreement is subject to the Folketing (Parliament) adopting the necessary legislation.

Danmarks Nationalbank likewise in January 2005 concluded an agreement with the Greenland Home Rule on the sale of Danmarks Nationalbank's entire shareholding in Grønlandsbanken.

Danmarks Nationalbank's accounts for 2004 show a profit of kr. 2.8 billion, compared to kr. 3.6 billion in 2003. This change is due primarily to the decline in net income from interest by kr. 0.5 billion, and in value adjustments by kr. 0.4 billion. Transfer of kr. 0.7 billion from the Value Adjustment Reserve to cover the negative value adjustments brings the total amount for distribution to kr. 3.5 billion, of which kr. 0.7 billion (20 per cent) is allocated to the General Reserves and kr. 2.8 billion (80 per cent) is payable to the central government.


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				Summary
					The global upswing continued in 2004 with growth at the highest level for a number of years. At the start of 2005 there are prospects of continued robust growth. For the euro area, the strength of the upswing depends especially on whether private consumption picks up. The Danish economy improved in 2004, with GDP growth at 2.0 per cent against 0.4 per cent in 2003. Domestic demand rose by 3,7 per cent and was broadly based on increases in both private consumption and investments. Housing prices rose by 8 per cent and helped to underpin private consumption. Imports of consumer goods also rose substantially, which contributed to a smaller current-account surplus than in 2003. The falling employment in recent years came to an end in 2004. This was partly attributable to an increase in subsidised employment. There are prospects that the upswing in the Danish economy is continuing in 2005. The low interest rates and rising real incomes will continue to sustain private consumption and investments. Since growth in domestic demand in 2005 is likely to be higher than for Denmark's trading partners, the tendency for the current-account surplus to diminish will continue. Inflation fell in 2004 despite rising oil prices. Wage increases diminished, but were still higher than in the euro area. Danish hourly wage costs are among the highest in the world, and in a future-oriented perspective globalisation will continue to make high demands on the innovation and adaptability of Danish enterprises if they are to remain competitive. The economic upswing contributed to improving government finances, particularly via higher tax revenue. A major economic-policy challenge in the future is to handle the pressure on government finances as the population ages over the next decades. This requires a sustained increase in private-sector employment so as to ensure fiscal-policy scope when the demographically determined decline in the labour force begins to materialise. This increase in private-sector employment is not likely to be realised without structural-policy initiatives. In June 2004, the Federal Reserve commenced a gradual normalisation of monetary policy. From June 2004 to February 2005 the fed funds target rate was raised on six occasions from 1.0 per cent to 2.5 per cent. The European Central Bank, ECB, maintained its interest rate at 2 per cent in 2004 in view of the moderate growth and subdued price development. The ECB's interest rate was last adjusted in June 2003. In the USA, the 10-year yield was virtually unchanged for the year overall, while the corresponding yield in the euro area fell. The divergence was attributable among other factors to better growth prospects for the USA than for the euro area, as well as the prospect of further monetary-policy tightening in the USA. In Denmark the yield on the benchmark 10-year government bond matched the development in the euro area in 2004, ending the year at 3.8 per cent. The yield spread was more or less constant at approximately 25 basis points, but narrowed to approximately zero at the end of 2004 and the beginning of 2005. The US dollar weakened against the euro, pound sterling and yen in the 2nd half of 2004 and reached the lowest level vis-à-vis the euro since 1999, when the euro was introduced. The background to the weakening included the increasing US balance-of-payments deficit. In 2004 the krone was stable against the euro at a level slightly stronger than the central rate and minor interventions were only required on a few occasions. Danmarks Nationalbank has not adjusted its interest rates since June 2003, when the lending rate was reduced to 2.15 per cent in connection with the ECB's lowering of its interest rate. The discount rate was lowered at the same time and is now 2.00 per cent. On 1 May 2004, 10 new countries joined the EU. Estonia, Lithuania and Slovenia were the first new EU member states to join ERM II in June 2004. The inclusion of the new currencies does not entail any changes in the terms for the Danish krone in ERM II. Proposals to amend the Stability and Growth Pact were submitted in 2004. Several member states, including Germany and France, exceeded the limit of 3 per cent of GDP for government budget deficits in 2004. The banks increased their profits substantially in 2004, inter alia due to increased income from fees and commission as well as a continued reduction of losses and provisions. As in recent years, both banks and mortgage-credit institutes continued to develop new loan products for homeowners. The many different loan options require detailed advice to be provided to homeowners on how their finances are affected by the various types of loans, e.g. if interest rates change. Danmarks Nationalbank marked the royal wedding in 2004 by issuing a commemorative coin in two versions: a 20-krone coin and a 200-krone coin. In the series of tower coins, two new coins were issued in 2004 and another in January 2005. The motifs are the Goose Tower in Vordingborg, Svaneke Water Tower and the tower of Landet Church on the island of Tåsinge. In March 2005 a Hans Christian Andersen coin is issued with a motif taken from The Ugly Duckling. The upgrading of the Danish banknote series continued in 2004 with the issue of a new, more secure 1,000-krone banknote. In 2004, Danmarks Nationalbank held a seminar for the central banks of the new EU member states on ERM II, which these countries must join before they can adopt the euro. Denmark has long-standing experience of conducting economic policy under a fixed-exchange-rate regime. The purpose of the seminar was to share this experience with the central banks of the new EU member states. In January 2005, Danish Ship Finance, the Danish Ministry of Economic and Business Affairs and Danmarks Nationalbank concluded an agreement on the restructuring of Danish Ship Finance as a limited liability company. The agreement is subject to the Folketing (Parliament) adopting the necessary legislation. Danmarks Nationalbank likewise in January 2005 concluded an agreement with the Greenland Home Rule on the sale of Danmarks Nationalbank's entire shareholding in Grønlandsbanken. Danmarks Nationalbank's accounts for 2004 show a profit of kr. 2.8 billion, compared to kr. 3.6 billion in 2003. This change is due primarily to the decline in net income from interest by kr. 0.5 billion, and in value adjustments by kr. 0.4 billion. Transfer of kr. 0.7 billion from the Value Adjustment Reserve to cover the negative value adjustments brings the total amount for distribution to kr. 3.5 billion, of which kr. 0.7 billion (20 per cent) is allocated to the General Reserves and kr. 2.8 billion (80 per cent) is payable to the central government.

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Summary