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The Icelandic economy–
spring forecast 2008
National economic forecast for 2008-2013
Is a hard landing imminent?
Thorsteinn Thorgeirsson,
Director-General, Economic Department
21 May 2008
Main conclusions
• Despite growing turbulence in financial markets in 2007, GDP
growth amounted to 3.8 per cent for that year. Investment,
private consumption as well as exports exceeded expectations.
• For this year, GDP growth is forecast at 0.5 per cent, mainly
based on a sharp increase in aluminium exports and a decline in
imports.
• GDP is forecast to contract 0.7 per cent in 2009, in part
because of an expected decline in private consumption and
housing investment. Business investment is forecast to continue
to decline despite the construction of another aluminium plant.
• For 2010, GDP is forecast to increase by 0.8 per cent as
private consumption revives as well as business investment.
Main conclusions, cont’d
• The external balance is improving rapidly. After peaking at
26% of GDP in 2006, the current account deficit reached 15.5
per cent in 2007. In 2008, it is expected to decline to 13.2 per
cent, before reaching 7,7% in 2009 and 6.6 per cent of GDP in
2010.
• Unemployment is forecast to increase to 1.9 per cent of the
labour force this year and to 3.8% in 2009, but to decline to 3.5
per cent in 2010.
• Inflation is expected to average 8.3 per cent this year and to
decline to 3.9 per cent in 2009 and to 2.5 per cent in 2010.
Main conclusions, cont’d
• There are numerous plans for further energy-intensive
investments including related power project construction. Should
these plans be carried out, annual GDP growth would be up to
1.5 per cent higher in the years 2009-2011.
•The increase in activity would be accommodated by slack
projected to develop in the economy in coming years.
• Main elements of uncertainty are i) the exchange rate, ii)
conditions in international financial markets, iii) further large
scale investment projects and iv) civil servant wage agreements
later this year.
GDP, domestic demand & current account,
1995-2010
In per cent of GDP
Economic growth
National expenditure
%
20
Current account balance, % of GDP
15
10
MÁNUDAGSKVÖLD!
5
0
-5
-10
-15
-20
-25
-30
1995
1997
1999
2001
2003
2005
2007
2009
Output gap, labour market gap & inflation
1998–2010
%
10
Output gap
Labour market gap
Inflation
8
6
4
2
0
-2
-4
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Real estate market in metropolitan area
2005 - 2008
Turnover (left-hand axis)
%
120
%
40
Price in real terms (right-hand axis)
105
35
90
30
75
25
60
20
45
15
30
10
15
5
0
0
-15
-5
-30
-10
2005
2006
2007
2008
Growth in private consumption per capita,
real estate prices and stock market prices
Private consumption (left-hand axis)
12-mo.
Housing prices (left-hand axis)
change (%)
OMXI-15 (right-hand axis)
125
12-mo.
change (%)
45
40
110
35
95
30
80
25
65
20
50
15
35
10
20
5
0
5
-5
-25
-10
-10
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
-40
New auto registrations
average
1998 = 1.0
2.6
Autos (left-hand axis)
Exchange (right-hand axis)
Auto trends (left-hand axis)
Exchange trends (right-hand axis)
average
1998 = 1.0
1.2
2.2
1.1
1.8
1.0
1.4
0.9
1.0
0.8
0.6
0.7
0.2
0.6
Jan.98 Jan.99 Jan.00 Jan.01 Jan.02 Jan.03 Jan.04 Jan.05 Jan.06 Jan.07 Jan.08
Private consumption & real disposable
income, 1995-2010
Disposable income per capita
Private consumption
Private consumption per capita
Change on
previous year (%)
15
12
9
6
3
0
-3
-6
-9
1995
1997
1999
2001
2003
2005
2007
2009
IMF alternative scenarios
Grunnspá
4
Frávikspá
Frávikspá
2
2
0
0
-2
Grunnspá
4
-2
2006
2008
2010
USA
2012
2006
2008
2010
2012
2014
Grunnspá
8
Euro-zone
Frávikspá
6
4
2
2006
2008
2010
2012
2014
World, other
2014
Further large scale investments
2008-2015
B.kr. at current prices
%
120
6.0
B.kr. (left axis)
% of GDP (right axis)
100
5.0
80
4.0
60
3.0
40
2.0
20
1.0
0
0.0
2008
2009
2010
2011
2012
2013
2014
2015
Alternative scenario:
further large scale investments
GDP growth (%)
Baseline forecast
Alternative scenario
3.5
3
2.5
2
1.5
1
0.5
0
-0.5
-1
2008
2009
2010
2011
2012
2013
2014
2015
Current account 2000-2010
% of GDP
5
Trade balance
Balance on income
Services balance
Current account balance
0
-5
-10
-15
-20
-25
-30
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Unemployment rate & wage index
2001-2010
12-mo.
change (%)
12
Wage index (left-hand axis)
Wage index, forecast (between annual averages)
Unemployment rate (right-hand axis)
Unemployment rate (annual average)
% of
labour force
4.5
11
4.0
10
3.5
9
3.0
8
2.5
7
2.0
6
1.5
5
1.0
4
0.5
3
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Exchange rate & currency market turnover
1999-2008
B.kr.
1 400
Total turnover (left-hand axis)
Exchange rate index (right-hand axis)
Exchange rate index, forecast (annual average)
1991=100
1 200
1 000
160
150
140
800
130
600
400
120
200
110
0
100
jan.99jan.00 jan.01jan.02 jan.03jan.04 jan.05 jan.06jan.07jan.08jan.09 jan.10
Exchange rate & inflation 2000-2010
%
30
CPI
CPI excl. housing component
Exchange rate index, annual change
CPI Forecast
Inflation target
25
20
15
10
5
0
-5
-10
-15
-20
jan.00 jan.01 jan.02 jan.03 jan.04 jan.05 jan.06 jan.07 jan.08 jan.09 jan.10
Interest rate development 2001-2008
3-mo. REIBOR
Non-indexed interest rate
%
18
Policy rate
Indexed interest rate
16
14
12
10
8
6
4
2
2001
2002
2003
2004
2005
2006
2007
2008
Bank lending to domestic & foreign parties
2003-2008
12-month
change (%)
180
Lending to domestic sector
Lending to foreign sector
160
140
120
100
80
60
40
20
0
-20
jan.03 júl.03 jan.04 júl.04 jan.05 júl.05 jan.06 júl.06 jan.07 júl.07 jan.08
Public investment 1998-2010
% of GDP
5
General government
Central government
Local governments
4
3
2
1
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Central government revenue balance
1998-2010
Financial balance (right-hand axis)
Revenue (left-hand axis)
Expenditure (left-hand axis)
% of GDP
37
% of GDP
6
36
5
35
4
34
3
33
2
32
1
31
0
30
-1
29
-2
1998
2000
2002
2004
2006
2008
2010
Risk premia in European money market
spread between 3 mo. EURIBOR & EONIA swap index
%
1,2
1
0,8
0,6
0,4
0,2
0
-0,2
Jan.07 Mar.07 May.07 Jul.07
Sep.07 Nov.07 Jan.08 Mar.08 May.08
CDS spreads for the Icelandic banks
Basispoints
1200
Glitnir
Kaupthing
Landsbanki
iTraxx Europe
1000
800
600
400
200
0
Mar.06 May.06 Jul.06 Sep.06 Nov.06 Jan.07 Mar.07 May.07 Jul.07 Sep.07 Nov.07 Jan.08 Mar.08 May.08
The Icelandic Economy
Is a hard landing imminent?
• The profile of the projections suggests a downturn
similar to that seen in 2001-2002.
• The economy is expected to enter a moderate recession
in 2009 but a recovery in 2010.
• A hard landing is therefore not expected.
• Areas of uncertainty include conditions in international
financial markets, the exchange rate and further largescale investment projects.
• The strong position of the Treasury and the pension fund
system along with flexibility and resilience of the economy
make it better able to handle present conditions and
restore balance.
The Icelandic Economy
Is a hard landing imminent?
Mange tak!