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Economic growth is strong with continued expansion in tourism, robust private consumption and favourable terms of trade. Steep wage gains, employment expansion and large investments are fuelling domestic demand. The capital controls introduced during the financial crisis are being lifted.
Currency appreciation and low import prices have kept inflation low. Inflationary pressures from wage increases and uncertainty with respect to the lifting of capital controls nevertheless call for a tight monetary stance. Moreover, the central bank should continue using its macro-prudential toolkit to tackle potentially large short-term capital inflows that might follow the lifting of capital controls. Reformed wage bargaining could prevent a future wage-price spiral while improved competition and reduced barriers to entry would boost productivity.
Iceland has considerably improved its fiscal position, reduced its net public debt and introduced a new budget law. Given the position of the economy, fiscal expansion would be unwise. But resources could be redeployed to health, pensions, and public infrastructure. Doing so would make growth more socially inclusive.
Economic Survey of Iceland (survey page)