Iceland has shown remarkable resilience to multiple shocks since 2019. The growth outlook is broadly favorable though accompanied by imbalances and subject to significant risks. These risks include more persistent inflation, tensions around the upcoming wage negotiations, and tighter global financial conditions. This is the conclusion of an International Monetary Fund mission to Iceland April 25–May 9, 2023.
In a statement at the conclusion of the visit, the mission warned that with the economy overheating and inflation well above target, macroeconomic policies need to be tightened, while protecting the most vulnerable. Structural reforms should facilitate diversification, and improve the sustainability and productivity of traditional export industries, including tourism. The upcoming wage negotiations provide an opportunity to better align real wages and productivity growth.
Fastest economic growth since 2007
The economy has rebounded quickly from the shocks in recent years, with economic growth in 2022 the fastest since 2007. GDP growth reached 6.4 percent in 2022 on the back of rebounding tourism and strong domestic demand, and higher incomes from an improvement in the terms of trade. The economy is operating well above potential which, together with high import and house prices, has pushed inflation significantly above target, and contributed to external imbalances.
Slowing domestic demand is expected to reduce imbalances, while favorable medium-term growth prospects suggest scarring from the pandemic will be minimal. 2023 growth is projected around 3 percent while inflation is forecast to decline modestly to around 7 percent.
The International Monetary Fund mission, led by Magnus Saxegaard, and comprising Mahir Binici, Jorge Iván Canales Kriljenko, Yen Mooi, conducted discussions for the 2023 Article IV consultation with Iceland during April 25–May 9, 2023. Etienne Yehoue, Financial Sector Assessment Program (FSAP) mission head, joined the concluding meeting.
See the full statement here.
