Economic outlook, analysis and forecasts

Iceland - Economic forecast summary (November 2015)


The economy continues its robust recovery. Strong household income growth and investment will fuel domestic demand in 2016. However, as investment slows and interest rates increase growth will begin to moderate. Lifting the capital controls introduced during the financial crisis is planned to begin in 2016.

Inflationary pressure is mounting as spare capacity is eliminated and wage settlements have been far in excess of productivity growth. As a result, monetary policy has started tightening. Further interest rate increases will be necessary to stop a wageprice spiral emerging. The fiscal deficit has fallen markedly, and the budget targets a small surplus in 2016. Accordingly, public debt is falling in relation to GDP. Windfall receipts that arise during the lifting of capital controls should be used to retire government debt, which carries a high interest rate.

Greenhouse gas emissions decreased following the crisis and are currently below the Kyoto-related target. Greenhouse gas abatement policies have been put in place, including a tax on the carbon content of fuel. The authorities should ensure that the effective tax rate on carbon is harmonised across different fuels.


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