Summary

The Danish economy continued to boom in 2006, unemployment fell to the lowest level since the first part of the 1970s, and employment rose to the highest level ever. An increasing number of bottlenecks were reported. Wage increases rose, and remained higher than among Denmark's trading partners. Domestic market-determined inflation rose, but the rate of increase in the overall index of consumer prices remained low.

The strong increase in private consumption especially reflected the growth in disposable incomes, while the substantial increases in housing wealth were only converted to consumption to a small degree. Recent years' very high rates of increase in housing prices subsided during 2006. Residential and business investments increased considerably. Exports rose, but far less than imports. The current-account surplus decreased by one third, but was still substantial. In view of the risk of detrimental overheating of the economy, prior to the Finance Act negotiations Danmarks Nationalbank recommended a fiscal-policy stance for 2007 that would curtail the increase in overall demand. The government adopted a wait-and-see approach.

In 2006, total employment rose by around 50,000, of whom 36,000 from unemployment or from activation schemes. The number of foreign workers increased by around 7,000, while rising participation rates – especially among older age groups – more than set off the underlying tendency for the labour force to diminish. This can hardly be repeated in 2007, so the shortage of labour will dampen output growth. Even though Danmarks Nationalbank's interest-rate increases since the end of 2005 will slow down the growth in demand to a degree, it will still be high in 2007. In view of the favourable cyclical outlook in both Denmark and abroad, there is still a risk of detrimental overheating.

The government surplus exceeded 4 per cent of GDP in 2006. This primarily reflected the favourable cyclical position, but also exceptionally high tax revenue from North Sea oil and gas production. In 2006 a welfare reform was adopted that is intended to make the Danish economy more robust towards the demographic changes of the next decades.

The banks' profits rose again in 2006, in some cases significantly. There was strong growth in lending and losses were very low. The underlying earnings of the mortgage-credit institutes generally decreased in 2006, primarily as a result of lower remortgaging activity compared to the very high level in 2005.

The global economy remained strong in 2006, with high growth in global GDP and an expansion of world trade. The rising activity was broadly-based, with increasing growth in Europe, sustained growth in the USA and Japan, and high growth in China and India. Although there were indications of stronger inflationary pressure in several countries, inflation remained low.

The fed funds target rate was raised by 0.25 per cent four times during 2006 to 5.25 per cent at year-end. The European Central Bank, ECB, raised its key interest rate in five increments of 0.25 per cent in the course of 2006, and again to 3.75 per cent in March 2007. In view of the risk of higher inflation, monetary policy was tightened in the USA and the euro area.

In both the USA and the euro area yields on the benchmark 10-year government bonds rose in 2006, but not by as much as the monetary-policy interest rates, so that the yield curves flattened.

The krone remained stable against the euro in 2006 at a level close to its central rate in the EU's Exchange-Rate Mechanism, ERM II. Danmarks Nationalbank sold foreign exchange net for kr. 34 billion in 2006, primarily in February. There was no intervention in the first two months of 2007, and the foreign-exchange reserve was kr. 178 billion at the end of February 2007.

Following the ECB's raising of its interest rates, Danmarks Nationalbank raised the lending rate, the discount rate and the current-account rate by 0.25 percentage points on five occasions during 2006, and again in March 2007. In addition, Danmarks Nationalbank unilaterally raised the lending rate by 0.1 percentage point in February 2006 as a consequence of the outflow of foreign exchange. After the interest rate was raised in March 2007 the lending rate was 4.0 per cent, while the discount rate and the current-account rate were 3.75 per cent.

On 1 January 2007, Slovenia adopted the euro and therefore ceased to participate in ERM II. This does not entail any adjustment of the terms for the Danish krone.

Bulgaria and Romania joined the EU on 1 January 2007. The EU now has 27 member states. Experience from 2006 so far with the reform of the Stability and Growth Pact in 2005 is positive, and the budgetary positions of most EU member states – including France and Germany – have improved.

The International Monetary Fund, IMF, undertook its regular review of the Danish economy in 2006. The IMF acknowledged the recent strong economic performance. In 2006 the IMF furthermore concluded its review of the Danish financial system as part of the Financial Sector Assessment Program, FSAP. The IMF overall found the Danish financial systems to be resilient and well-supervised.

In 2006, Danmarks Nationalbank commenced the work of designing a new Danish banknote series to replace the present series from 1997. The theme of the series will be Danish bridges and surrounding landscapes, or details from these landscapes. In the summer of 2006 Danmarks Nationalbank invited eight artists each to submit a draft proposal for the new banknote series, and in January 2007 Kaspar Bonnén and Karin Birgitte Lund were requested to elaborate on their respective proposals. In May 2007 Danmarks Nationalbank will announce which of the two artists is chosen to design the new Danish banknote series.

Two new tower coins and two new fairy tale coins were issued in 2006. Both the tower and fairy tale coin series will be completed in 2007. The tower coin series is followed by a new coin series for which the chosen theme is ships. To mark the International Polar Year, a new coin series with motifs from the Polar regions is issued.

Danmarks Nationalbank's accounts for 2006 show a profit of kr. 2.2 billion, compared to kr. 4.9 billion in 2005. The change is due primarily to a decrease in value adjustments by kr. 0.7 billion compared to an increase in value adjustments of kr. 1.2 billion in 2005, and that there was an extraordinary revenue of kr. 0.8 billion in 2005. Transfer of kr. 0.7 billion from the Value Adjustment Reserve to cover the year's decrease in value adjustments leaves kr. 2.9 billion for distribution, of which kr. 0.6 billion is allocated to the General Reserves and kr. 2.3 billion is payable to the central government.