Iceland’s Economy: Stable, But Vulnerable To Tremors In Housing And Tourism

A new report from the Central Bank on Iceland’s financial stability has been released, and indicates that while the economy is more or less stable, there are some vulnerable pressure points; particularly, in the sectors of tourism and housing, RÚV reports. An upset in both or either of these sectors could have damaging effects on the Icelandic economy.

According to the findings of the report, the economy is stable, but it has grown, and the greatest risk areas are in housing and tourism. The rate of growth in tourism has been slowing, but that growth still carries risk, and a backlash against the industry could have a rippling effect on the banks and the economy.

At the same time, while the cost of real estate has more or less stabilised, household debt has increased faster than ever, although the Central Bank believes this debt growth is sustainable. However, the cost of professional real estate has increased rapidly, which has driven business loans to these companies.

Bank loans were also a central feature of the report. 10% of business loans made by the banks went into the tourism industry alone, and 20% went to real estate and construction companies. This means that if the tourism industry does experience a significant enough downturn, it could result in late payments or defaulting on these loans, which would naturally have consequences for the Icelandic economy and the strength of the króna (ISK).

The ISK has been strengthening, demonstrating a significant upswing in value over the past six months alone. The more it strengthens, the greater a slowing-down impact the currency could have on the tourism industry.