Iceland Economy - an overview

ECONOMY

The strength of the Icelandic economy is also its weakness. It is a small economy, it is thin and it is snappy. However, the last year was not the best one in our economic history, the GDP Growth was only 2.6% and the Current Account Balance was -26.5% of GDP which might be a world record.

For the last few years, the Icelandic economy has been doing quite well and has been in the spotlight of late. According to Frederic S. Mishkin and Tryggvi T. Herbertsson, authors of a thorough report on the subject, Financial Stability in Iceland, this is good news in some ways and bad news in others.

Iceland is the smallest economy in the world to have its own currency and a flexible exchange rate. Ups and downs, in other words. Flexibility has been an asset. Iceland is also considered to have excellent institutions, a low corruption rate, high education and freedom of the press. Furthermore, the country’s financial regulation and supervision is generally considered efficient. Iceland’s fiscal position is superior by far to that seen in countries such as the United States, Japan and Europe.

Iceland is a small and young economy, and therefore vulnerable when the impact of financial flows is taken into account. A small change (as a percentage of overall flows in international markets) can have a huge impact, and flexibility is not always an option.

To put it bluntly: Icelandic economy is unique in size, its framework is outstanding, its fiscal position has been pretty strong so far, and its financial system is quite unique. The outlook is bright.

In other words, Iceland is an advanced country wit excellent institutions. Its GDP per capita, adjusted for PPP, ranks fifth highest in the world. Other figures speak for themselves: longevity is highest for males and the third highest for females. Unemployment is virtually unknown, much lower than the natural rate. Net government date is close to nil, labour force participation among older workers the highest in the world, and that of women the highest in the OECD (nearly 80%, compared to an average of 56% in the OECD).

Every silver cloud has its lining, though. According to figures published by Statistics Iceland, 71.1% of children aged 0 – 5 placed in day care spent 8 hrs. per day or more in day care centers in the year 2005. compared to 40.3% in 1998.

Statistics Indicators for Icelandic Economy

Iceland, sq km ¹ 103,000

Population (31. Dec. 2006) ¹ 307,602

GDP Per Capita (US$, PPP) ¹ 39,257

GDP Per Capita, Current Exchange Rate (US$) ¹ 53,766

GINI 2005 for Individuals after Taxes ¹⁰ 0.4

GDP Growth 2006 (%) ¹ 2.6

Inflation last 12 months (%) ¹ 5.9

Unemployment 2007, 3 q (%) ¹ 2.6

Life Expectancy at Birth (years) ¹ 81.2

ICEX-15 Equity Price Index 2006, % ³ 15.8

Corruption Perception Index (rank)⁶ 1

Worldwide Competitiveness (rank) ⁵ 7

Global Competitiveness Index 2006 ⁹ 14

The Business Competitiveness Index⁹ 13

Political Rights and Civil Liberties (rank)⁷ 1

Economic Freedom (rank) ⁴ 15

Balance of Trade 2005 (% of GDP) ¹ -9.3

Current Account Balance 2006 (% of GDP) ⁸ -27.4

Central Government Revenue 2006 (% of GDP) ¹ 34.6

Central Government Expenditure 2006 (% of GDP)¹ 30.0

General Government Financial Balance 2006 (% of GDP) ¹ 5.3

Net Savings 2005 (% of GDP) ¹ 1

Gross Savings 2005 (% of GDP) ¹ 12

Gross Domestic Investment 2005 (% of GDP) ¹ 28.45

Sources: (1) Statistics Iceland, (2) OECD, (3) Iceland Stock Exchange,

(4) Heritage Foundation and The Wall Street Journal,

(5) IMD World Competitiveness Report, (6) Transparency International,

(7) Freedom House, (8) Ministry of Finance

(9) World Economic Forum, (10) Internal Revenue Directorate

Lowest corruption, competitiveness and economic freedom are all assets flaunted by Iceland.

Iceland’s fiscal position has been strong during the last decade or so. The government has shown a surplus in the budget for most years. Iceland is not threatened by a pension crisis, as a reform of the pension system, initiated in 1969, has led to stability and had a healthy influence on the banking system. However, the baby-boomers are now starting to retire and we will have some trouble with the working force, yet less than the countries in "old" Europe!

Every wage earner must contribute at least 4% of his earnings to an occupational fund of his choice, most of the time one indicated by his trade union. The employer, on the other hand, contributes 8% of the total contribution. The risk of poverty is low in Iceland and the standard of living is very high. Therefore, the labour cost is high in Iceland, but the Icelandic workers keep a greater part of their wages than the workers in the EU.

The financial sector in Iceland is quite unique. In the course of a 120 years, it has grown from a primitive barter market to a full-fledged liberal market. What happened? Well, the EEA-agreement was the key factor, but the overall liberalization of the economy, privatization, and globalization have had an impact as well.

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