Summary

The economic upswing in Denmark became even stronger in 2005. GDP grew by 3.4 per cent, against 1.9 per cent in 2004. Private consumption rose considerably as a result of higher disposable incomes, low interest rates, new loan products and accelerating housing prices. Housing prices increased by 22 per cent for the full year. Exports and imports rose significantly, and the current-account surplus remained high. At 1.7 per cent, inflation was still low.

The upswing is set to continue in 2006. Growth in private consumption is likely to be high, and if property prices continue to rise this will stimulate consumption further. Residential and non-residential investments will be at a high level, and exports will be positively affected by sound growth in the export markets. Although Danmarks Nationalbank's raising of its interest rates in recent months may to some extent dampen demand, there is still a risk of the economy overheating. If the positive development is to continue, fiscal policy must not contribute to increasing demand.

There was a large government surplus in 2005 as a result of the favourable cyclical development, as well as extraordinarily high revenue from the taxation of pension yields and from oil and gas activities in the North Sea. Growth in government consumption diminished, but at 1.3 per cent still exceeded the government's target. The implementation of the local-government reform in 2006 will require further management of expenditure if the target for government consumption is to be met. Since the surplus is partly of a temporary nature, and as there are increasing capacity problems in the labour market, the surplus should be used solely to reduce government debt.

Unemployment fell significantly during 2005, and by the end of the year was back at the low level seen in 2001. Employment rose by approximately 17,000. Unemployment is expected to decline further. In the construction industry and the financial sector there is already a considerable shortage of labour, and the labour market councils expect more bottlenecks in 2006. So far, accelerating wage increases have not been registered, but the labour market should be monitored closely.

The strong economy gives scope to expand the workforce, but without labour-market reforms, including measures that take rapid effect, it will be hard to achieve a sustained increase in employment. A solution would be to employ labour from e.g. eastern Europe and Germany. This has helped to ease the pressure on the labour markets in countries such as Ireland, the UK and Norway.

The profits of the Danish banks and mortgage-credit institutes increased substantially again in 2005. The largest banks achieved a return on equity after tax of around 18 per cent, compared to 15 per cent in 2004. This improvement is, among other things, attributable to the favourable cyclical position, which contributed to high growth in lending and a sustained low level of losses, as well as considerable remortgaging activity.

The upswing in the global economy continued in 2005, but at a lower rate than in the preceding year. US growth was sound, while growth in the euro area did not pick up until the 2nd half-year. The high rate of global growth and China's integration into the global economy exerted upward pressure on oil prices, but did not seriously affect the development in prices for other products or in wages.

The Federal Reserve continued to raise the fed funds target rate. It was increased on nine occasions, from 2.25 per cent in January 2005 to 4.50 per cent in January 2006. Against expectations of higher inflationary pressure in the future, the European Central Bank, ECB, raised its key interest rate by 0.25 percentage points in December 2005 and in March 2006, to a total of 2.50 per cent.

Even though monetary policy was tightened in the USA, the US 10-year yield remained by and large unchanged over the year. The equivalent euro area yield fell as a consequence of uncertainty concerning the future development of the European economy. The higher level of interest rates in the USA contributed to strengthening the US dollar against the euro, pound sterling and yen.

The krone remained stable vis-à-vis the euro again in 2005, at a level close to its central rate. Danmarks Nationalbank sold foreign exchange net for around kr. 18 billion in 2005 in connection with intervention to stabilise the exchange rate. The foreign-exchange reserve was kr. 212 billion at the end of 2005, but fell to kr. 182 billion at the end of February 2006 as a result of intervention.

In response to the ECB's raising of its interest rates, Danmarks Nationalbank raised its lending rate, discount rate and current-account rate by 0.25 percentage points in December 2005 and in March 2006. In addition, the lending rate was raised by 0.10 percentage points in February 2006 following an outflow of foreign exchange. After the increase on 2 March, the lending rate was 2.75 per cent, while the discount and current-account rates were 2.50 per cent.

Cyprus , Latvia, Malta and Slovakia joined ERM II in 2005, which means that seven of the ten new EU member states are now ERM II participants. The participation of the new currencies does not entail any adjustment of the terms for the Danish krone.

The process to ratify the Constitutional Treaty for the EU was suspended after the Treaty was rejected by referenda in France and the Netherlands in the early summer of 2005. In March 2005 the EU member states agreed on a reform of the Stability and Growth Pact. According to the European Commission's estimate, 11 member states, including five euro area member states, exceeded the Treaty's 3-per-cent limit for government budget deficits in 2005.

By agreement with Denmark, the IMF began an assessment of the Danish financial sector (FSAP), equivalent to the assessments performed in many other member countries. The conclusions are expected to be published in the autumn of 2006.

In 2006, Danmarks Nationalbank will initiate the process to design a new Danish banknote series to replace the existing series from 1997. The first banknote in the new series is expected to be issued in 2009.

To mark the bicentenary of the birth of Hans Christian Andersen, Danmarks Nationalbank began the issue of a new series of coins with fairy tales as their common theme. In 2005 two fairy tale coins and two tower coins were issued.

Danmarks Nationalbank's accounts for 2005 show a profit of kr. 4.9 billion, compared to kr. 2.8 billion in 2004. This change is due primarily to an increase in value adjustments by kr. 1.9 billion and in other income by kr. 0.8 billion, while net income from interest fell by kr. 0.3 billion. Transfer of kr. 1.2 billion to the Value Adjustment Reserve leaves kr. 3.7 billion for distribution, of which kr. 0.7 billion (20 per cent) is allocated to the General Reserves and kr. 3.0 billion (80 per cent) is payable to the central government.