Iceland

Iceland: temporary boost

The Icelandic economy is growing at a strong pace, showing excellent economic performance, despite weak economic activity in the euro area. The EPI grades Iceland’s current economic performance at a solid A- level, with the EPI score projected to be 95.6% in 2016.

GDP growth is projected to be 3.7% in 2015, driven by internal consumption and investment, while relatively weak demand from key export markets in the EU will mean a small negative contribution from the external sector. After peaking at 12.7% in 2008 during the financial crisis and a sharp currency depreciation, inflation increased and is projected to be close to 4.5% in 2016. Unemployment levels are low and close to 4%. A multi-year fiscal consolidation program has reduced the deficit from 13.1% of GDP in 2008 to projected surplus of 0.4% in 2016, as the government raises revenue from the stability tax as part of its capital-account liberalization strategy.

The 5-Minute Economist projects Iceland’s EPI score to decline about 95% by 2020 but and stay at the A/A-level. GDP growth is likely to slow down from the currently high levels and a pick-up in inflation is likely to follow. The government is projected to run closed to a balanced budget and the unemployment level is likely to stay around 4%.