Report and Accounts 2003

Growth picked up in the USA and Japan in 2003, but contrary to expectations the economic upswing did not emerge in the euro area. At the start of 2004 there are clear indications that an international upswing has set in, but its strength is still uncertain, particularly in the euro area.

As in the euro area, growth in the Danish economy was sluggish in 2003. The modest increase in GDP of 1.0 per cent in 2002 was followed by zero growth in 2003. Growth in private consumption was weak at the beginning of 2003, but picked up in the 2nd half. Business investments fell, and residential investments were at the same level as in 2002. Owing to the weak foreign and domestic demand, both exports and imports were stagnant so there was still a large current-account surplus.

Employment declined, particularly at the beginning of the year, and unemployment rose. The rate of wage increase decreased, but was still higher than in the euro area. The rate of price increase fell, reflecting a weaker development in the prices of energy and food, as well as reduced indirect taxes.

After two years of low growth the Danish economy now seems to be picking up again. An upturn in the international economy will strengthen exports. In addition, the conditions for further growth in private consumption are present, inter alia as a result of higher real income, the reduction of direct and indirect taxes, a continued low level of interest rates, and the considerable lending and conversion activity in the mortgage-credit sector. The strength of the upswing will, however, to a large extent depend on the strength of the upturn in the euro area.

Despite the weak economic development, the government surplus was 1.3 per cent of GDP in 2003 as a result of higher revenue from taxation of pension yields and corporate tax. Growth in public consumption declined to 1.2 per cent.

There are prospects of a continued government surplus in 2004, but in the longer term the ageing population will lead to higher expenditure and lower receipts from taxation. Continued medium-term orientation of fiscal policy with a view to debt reduction and growth in private employment is therefore required. It is not sufficient that employment is reduced to the low rate seen in 2002. It is necessary to expand the labour force and improve competitiveness. Against the background of the tax cuts adopted it is important to ensure the planned low increase in public consumption.

The central banks in the USA and the euro area relaxed their monetary policy further in 2003. On the grounds of the risk of an undesirable fall in inflation, the Federal Reserve lowered the federal funds target rate by 0.25 per cent to 1.0 per cent in June. However, the deflation concerns subsided in step with the increase in growth and improved growth prospects. The European Central Bank, ECB, lowered its interest rates on two occasions in the 1st half of 2003 by a total of 0.75 per cent to 2.0 per cent. The underlying factor was improved prospects of price stability as a result of the weak economic activity in the euro area.

The US dollar weakened further vis-à-vis the euro in 2003. The weakening reflected e.g. concerns as to the financing of the large, growing balance-of-payments deficit in the USA, as well as the sustainability of the public finances in the long term.

In the USA long-term interest rates fell throughout the 1st half of the year to a very low level, but from June they increased considerably within few months. Long-term interest rates in Europe more or less mirrored the development in the USA, but the fluctuations were less pronounced. The Danish 10-year yield spread to the euro area remained more or less unchanged during the year, and at end-2003 it was around 0.2 per cent.

As a consequence of Denmark's fixed-exchange-rate policy the krone has been stable against the euro and close to the central rate of kr. 7.46 per euro for a number of years. In 2003 there was a tendency for the krone to strengthen in the 1st half of the year, and Danmarks Nationalbank unilaterally lowered its lending rate by 0.05 per cent in May. The spread between Danmarks Nationalbank's lending rate and the ECB's minimum bid rate thereby narrowed to 0.15 per cent. Towards the end of 2003 and in early 2004 the krone weakened slightly, but remained on the strong side of the central rate vis-à-vis the euro. At the beginning of 2004 Danmarks Nationalbank sold foreign exchange in the market.

The fixed-exchange-rate policy entails that the interest-rate policy of Danmarks Nationalbank mirrors that of the ECB. Danmarks Nationalbank therefore followed the ECB and lowered its discount rate by a total of 0.75 per cent to 2.0 per cent. The lending rate was lowered by a total of 0.80 per cent to 2.15 per cent.

On 1 May 2004, 10 new member states will join the EU. Many of the countries wish to join the euro and several of them envisage early participation in the EU's Exchange Rate Mechanism, ERM II, where Denmark is currently the only participant.

Insufficient consolidation of government finances in the years 1999-2000 together with the decline in growth in recent years have resulted in budget imbalances in several euro area member states. Especially France and Germany do not comply with the provisions of the Stability and Growth Pact.

The banks presented sound surpluses in 2003, owing to increasing net income from interest and fees, and capital gains. The extensive conversion activity boosted the earnings of the mortgage-credit institutes. The 4th quarter saw the introduction of deferred-amortisation loans for owner-occupied housing and summer cottages. These loans comprised 1/3 of gross new lending in that period.

Upgrading of the banknote series continued in 2003 when the 200- and 500-krone banknotes were given the two new security features – a hologram and fluorescent colours. Danmarks Nationalbank issued the 20-krone coin with a new design on the reverse, as well as two new thematic coins with motifs of the dragon-tail spire of the old Copenhagen Stock Exchange, Børsen, and Christiansborg Palace Tower, respectively.

Danmarks Nationalbank published a new edition of "Monetary Policy in Denmark", as well as the books "Financial Management at Danmarks Nationalbank" and "Mona – a quarterly model of the Danish economy". In addition, a publication was issued about the Danmarks Nationalbank building.

Danmarks Nationalbank's accounts for 2003 show a profit of kr. 3.6 billion against kr. 6.7 billion in 2002. The change is primarily attributable to a fall in value adjustments, etc. by kr. 2.4 billion to kr. -0.3 billion, which is transferred from the Value Adjustment Reserve. Of the remaining result, 20 per cent – kr. 0.8 billion – is allocated to the General Reserves. The remaining kr. 3.1 billion is payable to the central government.


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				Summary
					Growth picked up in the USA and Japan in 2003, but contrary to expectations the economic upswing did not emerge in the euro area. At the start of 2004 there are clear indications that an international upswing has set in, but its strength is still uncertain, particularly in the euro area. As in the euro area, growth in the Danish economy was sluggish in 2003. The modest increase in GDP of 1.0 per cent in 2002 was followed by zero growth in 2003. Growth in private consumption was weak at the beginning of 2003, but picked up in the 2nd half. Business investments fell, and residential investments were at the same level as in 2002. Owing to the weak foreign and domestic demand, both exports and imports were stagnant so there was still a large current-account surplus. Employment declined, particularly at the beginning of the year, and unemployment rose. The rate of wage increase decreased, but was still higher than in the euro area. The rate of price increase fell, reflecting a weaker development in the prices of energy and food, as well as reduced indirect taxes. After two years of low growth the Danish economy now seems to be picking up again. An upturn in the international economy will strengthen exports. In addition, the conditions for further growth in private consumption are present, inter alia as a result of higher real income, the reduction of direct and indirect taxes, a continued low level of interest rates, and the considerable lending and conversion activity in the mortgage-credit sector. The strength of the upswing will, however, to a large extent depend on the strength of the upturn in the euro area. Despite the weak economic development, the government surplus was 1.3 per cent of GDP in 2003 as a result of higher revenue from taxation of pension yields and corporate tax. Growth in public consumption declined to 1.2 per cent. There are prospects of a continued government surplus in 2004, but in the longer term the ageing population will lead to higher expenditure and lower receipts from taxation. Continued medium-term orientation of fiscal policy with a view to debt reduction and growth in private employment is therefore required. It is not sufficient that employment is reduced to the low rate seen in 2002. It is necessary to expand the labour force and improve competitiveness. Against the background of the tax cuts adopted it is important to ensure the planned low increase in public consumption. The central banks in the USA and the euro area relaxed their monetary policy further in 2003. On the grounds of the risk of an undesirable fall in inflation, the Federal Reserve lowered the federal funds target rate by 0.25 per cent to 1.0 per cent in June. However, the deflation concerns subsided in step with the increase in growth and improved growth prospects. The European Central Bank, ECB, lowered its interest rates on two occasions in the 1st half of 2003 by a total of 0.75 per cent to 2.0 per cent. The underlying factor was improved prospects of price stability as a result of the weak economic activity in the euro area. The US dollar weakened further vis-à-vis the euro in 2003. The weakening reflected e.g. concerns as to the financing of the large, growing balance-of-payments deficit in the USA, as well as the sustainability of the public finances in the long term. In the USA long-term interest rates fell throughout the 1st half of the year to a very low level, but from June they increased considerably within few months. Long-term interest rates in Europe more or less mirrored the development in the USA, but the fluctuations were less pronounced. The Danish 10-year yield spread to the euro area remained more or less unchanged during the year, and at end-2003 it was around 0.2 per cent. As a consequence of Denmark's fixed-exchange-rate policy the krone has been stable against the euro and close to the central rate of kr. 7.46 per euro for a number of years. In 2003 there was a tendency for the krone to strengthen in the 1st half of the year, and Danmarks Nationalbank unilaterally lowered its lending rate by 0.05 per cent in May. The spread between Danmarks Nationalbank's lending rate and the ECB's minimum bid rate thereby narrowed to 0.15 per cent. Towards the end of 2003 and in early 2004 the krone weakened slightly, but remained on the strong side of the central rate vis-à-vis the euro. At the beginning of 2004 Danmarks Nationalbank sold foreign exchange in the market. The fixed-exchange-rate policy entails that the interest-rate policy of Danmarks Nationalbank mirrors that of the ECB. Danmarks Nationalbank therefore followed the ECB and lowered its discount rate by a total of 0.75 per cent to 2.0 per cent. The lending rate was lowered by a total of 0.80 per cent to 2.15 per cent. On 1 May 2004, 10 new member states will join the EU. Many of the countries wish to join the euro and several of them envisage early participation in the EU's Exchange Rate Mechanism, ERM II, where Denmark is currently the only participant. Insufficient consolidation of government finances in the years 1999-2000 together with the decline in growth in recent years have resulted in budget imbalances in several euro area member states. Especially France and Germany do not comply with the provisions of the Stability and Growth Pact. The banks presented sound surpluses in 2003, owing to increasing net income from interest and fees, and capital gains. The extensive conversion activity boosted the earnings of the mortgage-credit institutes. The 4th quarter saw the introduction of deferred-amortisation loans for owner-occupied housing and summer cottages. These loans comprised 1/3 of gross new lending in that period. Upgrading of the banknote series continued in 2003 when the 200- and 500-krone banknotes were given the two new security features – a hologram and fluorescent colours. Danmarks Nationalbank issued the 20-krone coin with a new design on the reverse, as well as two new thematic coins with motifs of the dragon-tail spire of the old Copenhagen Stock Exchange, Børsen, and Christiansborg Palace Tower, respectively. Danmarks Nationalbank published a new edition of "Monetary Policy in Denmark", as well as the books "Financial Management at Danmarks Nationalbank" and "Mona – a quarterly model of the Danish economy". In addition, a publication was issued about the Danmarks Nationalbank building. Danmarks Nationalbank's accounts for 2003 show a profit of kr. 3.6 billion against kr. 6.7 billion in 2002. The change is primarily attributable to a fall in value adjustments, etc. by kr. 2.4 billion to kr. -0.3 billion, which is transferred from the Value Adjustment Reserve. Of the remaining result, 20 per cent – kr. 0.8 billion – is allocated to the General Reserves. The remaining kr. 3.1 billion is payable to the central government.


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Summary