Growth picked up again in 2004, as households raised their spending and strong external demand pulled up exports. The expansion should continue, with accelerating exports gradually taking over as the main driver of growth. Inflationary pressures are likely to be modest as the output gap is projected to stay just below zero, but they may be less benign if households spend even more out of their income and wealth gains.

Tax cuts in 2004 and other measures to strengthen households’ disposable incomes continue to boost prospects for this year, while the planned resumption of Special Pension contributions will take back some of the stimulus next year. Monetary policy settings may provide further underpinning of growth in the near term, while a gradual tightening is projected in 2006, as Danish interest rates follow those of the European Central Bank. With growth likely to be above potential, the government should now return its focus to its medium-term targets for the fiscal balance and employment.