READ full country note (PDF)
Growth will ease but remain robust; the economy is approaching capacity limits. Household consumption will increase on the back of continued labour immigration and rising wages in 2018 but slow down in 2019. Business investment will decline after completion of several large projects. Unemployment has reached its lowest level since the 2008-09 economic and financial crisis and will continue to fall slightly. After a strong 2017, revenues from exports and tourism will decline.
After appreciating for two years, the króna edged down in the second half of 2017 and became more volatile, possibly due to the removal of capital controls. The central bank should stand ready to tighten the monetary policy stance to address inflationary pressures from strong demand. Fiscal policy should not be expansionary since growth is well above trend and inflationary tensions are emerging. Reforming the wage-bargaining system could help reduce the pro-cyclical impact of wage negotiations.
As a small open economy, Iceland remains vulnerable to external shocks. The financial system is stable. Deleveraging has improved firms' balance sheets. Debt restructuring and write-offs have reduced household indebtedness, while increased savings and rising asset prices improved their asset position. Capital flows stabilised despite the lifting of capital controls. Yet continued use of macro-prudential tools is warranted.
Economic Survey of Iceland (survey page)