The economic outlook for Iceland, like the global outlook, has fluctuated widely since we issued our macroeconomic forecast in January. In particular, developments in the COVID-19 pandemic and Russia’s invasion of Ukraine have changed the outlook in the interim. Furthermore, there is considerable uncertainty about the results of private sector wage negotiations later this year. Domestic economic developments in the coming term will be affected in no small part by whether or not wage settlements entail a smooth landing featuring wage rises in line with moderate inflation. Circumstances at the time the wage negotiations begin in earnest will also depend not least on the aforementioned two factors.
Although our recently published macroeconomic forecast depicts the path we consider likeliest in the coming term, the aforementioned factors, all of which will presumably be clarified in the next few quarters, will have a major impact on developments in 2022 and the years to follow. Because of this, we decided to supplement our baseline forecast, which we consider both the likely outcome and a balanced representation lying between optimism and pessimism about developments further ahead, with two alternative scenarios:
- An optimistic scenario, which we consider to have a roughly 10% probability of materialising or being exceeded
- A pessimistic scenario, which we consider to have a roughly 10% probability of materialising or being exceeded
The two alternative scenarios reflect developments that we consider realistic but much less likely to materialise than those in the baseline forecast.