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Moderate economic growth in coming years

The macroeconomic forecast of Landsbankinn Economic Research, published today, assumes a contraction in domestic product this year and negative economic growth of 0.4%. The outlook is for a moderate economic upswing in coming years and Economic Research forecasts positive economic growth of 2% domestically in 2020, followed by rather stronger growth in 2021 and 2022. Inflation will remain around the Central Bank’s target and interest will be low.

The macroeconomic forecast of Landsbankinn Economic Research for 2019-2022 was presented at 8:30, at a morning meeting in Silfurberg, Harpa.

Economic Research expects economic growth in coming years to be supported by low yet sustainable growth in private consumption, increased public investment, rising export and a turnaround in industrial investment going forward. The forecast reflects considerable uncertainty about global economic developments in the net 1-2 years, already materialising in the slower growth of international trade and manufacturing. Further escalation of these developments, beyond current expectations, may have a considerable negative impact on Iceland, i.e. on the travel industry, fisheries and seafood, and heavy industry. Conversely, a turn for improvement in global trade would have a more positive impact on the domestic economy than expected in the forecast. The forecast assumes that inflation will remain more or less at the CBI’s target (2.5%) throughout the forecast period, as economic growth is expected to harmonise with Iceland’s production capacity.

Daníel Svavarsson, Head of Landsbankinn Economic Research: “In Iceland, the end of growth phases has historically been followed by difficult transitional periods due to an imbalance that builds up in the preceding upswing. This time is an exception. Breaking with tradition, households and companies are currently generally well placed in terms of assets and liabilities. The purchasing power of wages has never been as high and the position of municipalities has generally grown stronger. The CBI has amassed a very handsome non-leveraged FX reserve, a significant departure from history, and, in addition, the continuing foreign trade surplus supports the ISK exchange rate.”

Other key points from Landsbankinn's forecast for 2019-2022:

  • Total public investment increased by 21.2% in real terms in 2018 and by 23.3% in 2017. The forecast expects public investment to continue to increase quite strongly in coming years, by 6% in 2019, 10% in 2020 and 5% in 2021 and 2022.
  • Industrial investment is expected to contract by 21.1% this year. If the forecast proves correct, this will be the largest contraction in industrial investment since 2009.
  • The forecast is for a 9.5% contraction in total investment in the domestic economy this year. If that forecast proves correct, this will be the largest contraction in investment since 2009.
  • A 5.7% contraction in export is expected this year, due mainly to the bankruptcy of WOW air and a slowdown in the travel industry. Export growth of 0.2% is expected in 2020, driven by growth in the travel industry. Export is expected to continue to show conservative growth in 2021 and 2022, again driven by growth in the travel industry.
  • Economic Research expects the real price of apartments to increase by around 1% per annum in coming years. Having regard for estimated inflation, nominal prices are expected to be 4% per annum until year-end 2022. Housing price increases will as such be low, historically speaking, and driven mainly by the rising purchasing power of wages, more favourable loan terms and higher purchasing capacity as disposable income increases following changes to the taxation system and the implementation of measures to facilitate housing purchases. It is noted that several factors may influence price developments and that government action is a significant influencer.
  • Economic Research assumes that investment in residential housing will increase by 15% this year and by 7% next year, with little change expected between years in 2021 and 2022. The rising housing investment that has characterised recent years will decrease.
  • Unemployment levels are likely to increase somewhat in the coming 6-18 months, though not by as much as previously feared. Economic Research forecasts a 3.6% increase in registered unemployment this year, a 4% rise in 2020 and an increase of 3.5% in 2021 and 2022.
  • Should public sector employees conclude collective bargaining agreements similar to those signed by the private sector as regards general wage increases, Economic Research expects the wage index to rise by 4.7% this year, 4.2% in 2020, 6% in 2021 and 4.9% in 2022.
  • Economic Research expects that the CBI’s Monetary Policy Committee will lower policy rates by an additional 0.25 percentage points this year so that policy rates stand at 3% at year end. If Economic Research’s forecast for rising economic growth and falling unemployment in 2021 proves correct, the department considers it likely that the time will be deemed ripe to loosen monetary policy controls in early 2022 and to increase policy rates slightly.
  • Economic Research expects a continued surplus on foreign trade and a relatively stable ISK exchange rate throughout the forecast period.
  • The forecast assumes a 6.4% contraction in import this year while import is expected to increase by 4% in 2020, 3.3% in 2021 and 4.5% in 2022.

Landsbankinn’s macroeconomic forecast for 2019-2022,
published on Umræðan (in Icelandic)

A summary in English