ICELAND - OECD.org

1 3. DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC outlook , VOLUME 2018 ISSUE 2 PRELIMINARY VERSION OECD 2018126 ICELANDG rowth is projected to slow towards more sustainable rates. Consumption growthwill ease as employment and wages decelerate. Exports of goods and services, especiallytourism, will weaken after a strong 2018, while imports will decline following slowinginternal demand. The residential housing boom will ease and the growth of privateinvestment will weaken. The unemployment rate remains low, at around 3%.Inflation is creeping up, mainly due to a weaker exchange rate and higher importprices. The central bank raised the policy interest rate and is projected to increase itfurther to anchor rising inflation expectations.

2 Fiscal policy is projected to be broadlyneutral. However, a tighter stance via current expenditure containment would beappropriate as price pressures persist and public debt is declining only slightly. Theplanned tax relief for low-income earners will strengthen work incentives and make theeconomy even more is slowingDespite strong wage growth, private consumption is slowing because of easingemployment growth. Exports of marine products were exceptionally high in 2018, but arrivalsat Keflavik airport show weakening foreign tourism. Business investment is recovering fromthe slump earlier in 2018 but remains weaker than expected as demand momentum isdeclining. Capital flows remain muted despite a narrowing interest rate differential with othercountries.

3 Unemployment remains low and under-employment has edged down policy remains accommodativeThe projection includes considerable fiscal spending increases, as planned by thegovernment, in particular for infrastructure that boosts potential growth. Relief on incometaxes and social contributions for low-income earners will strengthen work incentives andhelp reduce income inequality. Although the budget remains in surplus and fostersinclusive growth, fiscal policy should be more contractionary, especially by streamliningIcelandSource:OECD Economic outlook 104 2 8 404812 505102000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020Y o y % changes GDP growth is easing 024680246820122014201620182020Y o y % changes % Headline inflation Short term interest rate Inflation is creeping up again 3.

4 DEVELOPMENTS IN INDIVIDUAL OECD AND SELECTED NON-MEMBER ECONOMIESOECD ECONOMIC outlook , VOLUME 2018 ISSUE 2 PRELIMINARY VERSION OECD 2018127public consumption, to build fiscal buffers. On current policies, public debt will declineonly is below the central bank s target but edged up in the second half of 2018,mainly because of wage drift, a weakening kr na, and rising import prices. In November, thecentral bank raised its policy interest rate by , the first increase since end-2015. Ratesare projected to rise further to reduce inflationary pressures, which will also help stabilisethe kr na. Capital inflows to ICELAND will ease further as relative rates of return are is one of the most egalitarian economies of the OECD thanks to highemployment, low pay and employment differences between men and women and atargeted tax and benefit system.

5 Over the past years, income inequality has declinedfurther. The planned tax and social contribution reliefs for low-income earners will helpmake ICELAND even more continues to slowGrowth is projected to slow to in 2019 and in 2020, owing to weaker exports,weaker business investment and slowing household consumption. Public investment forroads, schools and a new hospital will partially offset the decline in business investmentand increase longer-term potential small size of the economy makes it volatileand vulnerable, and minor changes to the outlook in the main foreign markets can quicklytranslate into large internal rebalancing. Risks also remain that a major volcanic eruptioncould destroy infrastructure and disrupt trade and transport far beyond :Demand, output and prices1 2 &XUUHQW SULFHV,6.

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