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Iceland’s recovery is solid, but challenges remain for sustainable growth

 

1/09/2015-Iceland has steadily recovered from the global financial crisis, with economic activity above pre-crisis levels and a number of other visible signs of normalisation, including falling unemployment, improved public finances and stronger household finances. However, critical post-crisis challenges still need to be addressed, notably the orderly unwinding of capital controls and the risk that wage settlements will push up inflation, according to the latest OECD Economic Survey of Iceland.

 

The Survey, presented in Reykjavik by OECD Secretary-General Angel Gurría and Iceland’s Finance Minister Bjarni Benediktsson, notes that the country is in its fifth year of economic recovery. The OECD projects GDP growth of 4.3% in 2015 and 2.7% in 2016 - well above the projected OECD average - and continuing growth through 2020.

 

“Iceland’s recovery has been impressive, with a stronger and quicker rebound than has been the case in the crisis-hit countries of Europe,” Mr Gurría said. “While our outlook is broadly positive, there is no room for complacency. Iceland still faces important challenges to ensure sustained growth, notably a pressing need to consolidate the pillars of macroeconomic stability, lock in progress on fiscal policy and lift productivity growth.”

 

The OECD welcomed Iceland’s recently-announced plan to lift capital controls, but underlined the need to preserve macroeconomic stability so as to minimise the risk of disorderly capital outflows. The Survey encourages Iceland to build up adequate financial and fiscal buffers, lower debt and raise bank capital and liquidity.

 

Recently-concluded wage settlements entail substantial pay increases, which could disrupt macroeconomic stability. Monetary policy has a key role to maintain low and stable inflation, which would be helped by ensuring the independence of the Central Bank from political interference. Fiscal policy achievements will also help to preserve stability, as the budget deficit has fallen gradually, from almost 13% of GDP in 2008 to nearly zero in 2014, with a small surplus projected for 2016. Gross debt, which almost reached 100% of GDP in 2011, has begun to fall.

 

While long-term projections suggest that Iceland is on track to achieve lower debt, the Survey shows that risks persist, including spending pressures on pensions and housing. Iceland can lock in fiscal sustainability by adopting the organic budget law and following its fiscal rules, establishing an independent Fiscal Council, using assets to pay down costly debt, avoiding creating new contingent liabilities and shifting tax from income to VAT.

 

The Survey also suggests Iceland set the course for future productivity growth, which is the key to boosting economic growth and living standards, through targeted policies. Adopting a productivity-friendly agenda, lowering barriers to entrepreneurship and investment, and strengthening competition would improve the business environment and spur innovation. Further investments in the quality of education and training and improving the timely high-school completion rates would lead to better skills uptake.  

 

An Overview of the Economic Survey, with the main conclusions, is freely accessible on the OECD’s web site at: http://oecd.org/iceland/economic-survey-iceland.htm.

 

You are invited to include this Internet link in reports on the Survey.  For further information on the Economic Survey, contact the OECD Media Office (+33 1 4524 9700).

 

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