The International Monetary Fund (IMF) staff has issued a mostly positive report on the current state of Iceland’s economy, but offered words of caution about the new risks on the horizon.
In terms of growth, the IMF staff has concluded that concerns about “overheating” have been alleviated, due in part to strengthening króna effectively “cooling” domestic demand and “dampening” the growth of the booming tourism industry. Inflation has stayed on target and the currency has been stable, so even though credit growth has been accelerating, IMF staff believe growth will continue more steadily.
However, IMF staff due see some dark clouds on the horizon, or at the very least, uncertainty.
“Strong oil prices and mounting air transport competition are challenging the airline business,” the report states. “Escalating world trade tensions threaten to hurt export prices for aluminum and other items. And uncertainty around Brexit negotiations raises the risk of weaker export demand from one of Iceland’s biggest markets and could further complicate North Atlantic fishing cooperation.”
Further, IMF staff are under the impression that, in the upcoming collective bargaining negotiations, Icelandic workers should not be given too great a pay rise.
“With purchasing power having increased by a remarkable 25 percent over the last four years—and even more if viewed in foreign currency terms—wage agreements should be in line with productivity gains to avoid further growth in unit labor costs,” they write.
Moving forward, Iceland needs greater clarity of fiscal policy, including “careful prioritization and execution” of fiscal plans regarding “public spending on infrastructure, healthcare, and education”, as well as balancing a strengthening economy with environmental sustainability; especially regarding tourism.
“In tourism, the growth slowdown adds urgency to adopting a holistic strategy and taking concrete actions, including to improve tourism services at popular sights and the accessibility of destinations farther afield from Reykjavík,” the IMF staff conclude. “In fisheries, careful management of marine resources remains central to success—this should include further efforts to secure durable fishing agreements with other North Atlantic fishing nations for several migratory species.”
The full report can be read here.