OECD Economic Outlook May 2019, Country Notes: Iceland

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Iceland The economy will slow significantly as exports, in particular tourism, decline because of the insolvency of a major domestic airline. Household consumption growth will ease on the back of moderate wage growth. Business investment will gradually recover from the current trough, but housing investment will ease further following a wave of new construction. Unemployment will edge up as the economy slows, and the current account surplus will narrow. Inflation and inflation expectations are rebounding as the króna is depreciating and wages are rising above productivity. The central bank should act to keep inflation within the target band if price pressures persist. Fiscal policy is expansionary and should be less so, although higher infrastructure spending could help boost productivity. Comprehensive regulatory reform is needed to maintain competitiveness and high wages. Growth is slowing The economy is slowing rapidly, mainly due to several temporary export shocks. Tourist arrivals are declining after a low-cost Icelandic airline has gone insolvent, cutting the number of flights to the country. A bad start to the fishing season and a partial shutdown in the aluminium industry add to the shock. The global economic slowdown has further weakened the demand for goods and service exports. Household demand, including for imports, is easing on the back of the recently concluded wage agreements. Business investment remains weak after the termination of large construction projects and because business confidence is low. The labour market is easing and unemployment has started to rise, especially after the airline’s demise. With external demand weakening, the current account balance is narrowing. Capital flows remain inconspicuous despite further liberalisation of capital controls.

Iceland Tourism is declining Thousands 2400

Inflation is rising following a weaker króna

Foreign passengers at Keflavik airport

Y-o-y % changes 8

ISK per USD 138

← Headline inflation

7 2000

1600 0 1200

800

400

2008

2010

2012

2014

2016

2018

133

Exchange rate →

6

128

5

123

4

118

3

113

2

108

1

103

0

2012

2014

2016

2018

98

Source: OECD Economic Outlook 105 database; and Statistics Iceland. StatLink 2 https://doi.org/10.1787/888933934470

OECD ECONOMIC OUTLOOK, VOLUME 2019 ISSUE 1: PRELIMINARY VERSION © OECD 2019


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