In late June, Icelandair reported that it had laid off 20% of its pilots. A few weeks later, it reported an 11% increase in passengers from the same time last year. What gives?
Ever since the economic collapse of 2008, people have been steeling themselves for the next one. “This is just like 2007,” is a mantra heard often now, ten years later. Almost nobody saw that one coming. But is another one upon us?
Boom and bust
The boom years of the early 2000s were driven by the banks, and everyone wanted a share in them. Until they all went bust. Now, everyone wants to build a hotel or own an airline or, more modestly, start renting out on Airbnb. Nineteen new hotels are being planned in Reykjavík alone—two of which will be bigger than the largest hotel currently operating in the city.
It’s no secret that the Icelandic economy, after the last boom and bust, was saved by tourism. In 2010, there were around 500,000 visitors to Iceland—roughly the same as in previous years. Last year, there were 1.8 million. The number has been growing by 15% to 20% to 30% a year, achieving a 40% increase from to 2015-2016.
This has led to the króna getting ever stronger. That’s not great news for the tourism industry, as it makes everything here more expensive. According to the latest figures this month, only Bermuda and a few cities in Switzerland are now more expensive than Reykjavík. So: does this mean the tourists will stay away?
Boom and boom?
Not really. At least not yet. Not only are they still coming, but according to Icelandair, there are 11% more tourists this year. So, what’s the problem?
It’s probably this. Last autumn, Íslandsbanki, one of the major banks (remember those guys?), projected a 35% increase in tourists this year. That got the hotel builders building, and Icelandair hiring. So, even if the sector is still growing, it’s less of an increase than Íslandsbanki projected. For those prone to overinvesting based on faulty forecasts, this can lead to economic collapse. So far, so familiar.
The tourist trade in Iceland is alive and well. It is even subsidised by favourable tax policies. Not only does it bring a lot of foreign currency into the country—real money this time, not imaginary banking figures—it also allows a lot of cultural things to exist that a small country could not otherwise support, including this magazine.
But it is not to be taken for granted—nor even desirable—that tourism will continue to increase exponentially. We can make a decent living out of two million tourists a year (yes, including this magazine). That’s a lot of visitors for a country of 340,000. But insisting, and expecting, that it will continue to grow at breakneck speed will only bring about the downturn that everyone so fears when forecasts fail.
It sounds like we’ve been here before. In early 2006, the banking system came under severe strain, and just barely avoided total meltdown. The lesson that could have been learned was about the need to downsize, or at least to check growth to a sustainable rate. Instead, the decision was made to open Icesave accounts for foreign depositors to take care of cash flow problems, and not listen to criticism. After all, they’d managed to survive—and business would continue to boom, right up until 2008, that is.
The mini-crisis in the tourism industry today could be seen as a similar test—as something to learn from, and a moment to seriously consider where we go from here. Maybe this time will be different. Or maybe not.