Islandsbanki Research has published a macroeconomic forecast for 2019-2021
Macroeconomic forecast 2019-2021
The outlook is for Iceland's GDP to contract by 0.1% in 2019. Actually, it is perhaps more accurate to say growth will be flat, as this figure is well within the margin for error of zero growth. A sharp contraction in business investment and services exports counterbalances consumption growth and a strong contraction in imports.
Highlights
The Icelandic economy is cooling. GDP to contract by 0.1% this year, followed by 1.3% growth in 2020 and 2.8% growth in 2021
Developments in exports, particularly in the tourist sector, a key driver for GDP development. Exports to contract by 6.0% in 2019 but return to growth in 2020 (1.1%), followed by 2.9% growth in 2021
Outlook for continuing C/A surplus, a major sea change from previous decades. We forecast a surplus of 3.5% of GDP for 2019, followed by around 2.5% surplus per year in 2020-2021
The ISK has played a major role in the current economic adjustment, depreciating by roughly 10% in H2 2018. The current ISK level seems sustainable and near-term risks for the exchange rate are broadly symmetrical
The labour market is softening. Unemployment is likely to peak at 4.2% in 2020 while the pace of real wage growth will pick up from 1.8% in 2019 to 2.4% in 2021
The inflation outlook is benign, with inflation expected to hit the CBI's 2.5% target by year-end 2019 end remain close to target.
Increased leeway by economic policy makers coupled with robust balance sheets of most households and businesses will make the economic adjustment significantly easer than has often been the case in Iceland
