Iceland 2017 OECD Economic Survey preserving sustainable-and inclusive growth

1. www.oecd.org/eco/surveys/economic-survey-iceland.htm
2017 OECD ECONOMIC
SURVEY OF ICELAND
Preserving sustainable and
inclusive growth
Reykjavik, Tuesday 27th June 2017
OECD
OECD Economics

2. Iceland has made a remarkable turnaround
2
90
95
100
105
110
115
120
125
130
90
95
100
105
110
115
120
125
130
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Index 2010 = 100Index 2010 = 100
Real GDP levels
Iceland Nordics (excl. Iceland) EU South (ESP, ITA, GRC, PRT)
Source: OECD Analytical Database.

3. Well-being is high
3
Indicators of well-being in Iceland
Work-Life
Balance
Education Housing Civic
engagement
Income Health Safety Life
Satisfaction
Community Environment Jobs
20% bottom performers 60% middle performers 20% top performers Iceland
Country rankings (1 to 35) Country rankings (1 to 35)
Source: OECD Better Life Index 2016.

4. Iceland is highly inclusive and egalitarian
4
0
0.1
0.2
0.3
0.4
0.5
0
0.1
0.2
0.3
0.4
0.5
ISL
NOR
DNK
SVN
FIN
CZE
BEL
SVK
AUT
LUX
SWE
NLD
HUN
DEU
FRA
CHE
POL
KOR
IRL
OECD
CAN
ITA
JPN
NZL
AUS
PRT
GRC
ESP
LVA
GBR
EST
ISR
TUR
USA
MEX
CHL
Gini of disposable income
0
0.2
0.4
0.6
0.8
1
0
0.2
0.4
0.6
0.8
1
TUR
KOR
JPN
HUN
SVK
GRC
CZE
CHL
MEX
AUT
ITA
ISR
AUS
USA
POL
CAN
LUX
PRT
ESP
BEL
EST
GBR
DNK
LVA
FRA
NLD
DEU
CHE
NZL
SVN
IRL
SWE
NOR
FIN
ISL
ScoreScore
Global Gender Gap Index
Score ranges from 0 (inequality) to 1 (equality), 2016
Source: OECD Income Distribution Database; and the World Economic Forum.

5. Major imbalances have been corrected
5
• Capital controls have been essentially lifted
-200
-175
-150
-125
-100
-75
-50
-25
0
25
50
-40
-35
-30
-25
-20
-15
-10
-5
0
5
10
2005 2007 2009 2011 2013 2015
% of GDP% of GDP
Current account and the Net
International Investment Position
Underlying current account balance² (lhs)
Current account balance (lhs)
NIIP (rhs)
Underlying NIIP (rhs)
40
50
60
70
80
90
100
150
170
190
210
230
250
270
2005 2007 2009 2011 2013 2015
%%
Leverage has been reduced
Households: debt to disposable income ratio (lhs)
Corporate: debt to total assets ratio (rhs)
Source: OECD Analytical Database; and Central Bank of Iceland.

6. Public debt is falling
6
0
20
40
60
80
100
120
2005 2007 2009 2011 2013 2015
% of GDP Public debt has been reduced
Net debt Gross debt
Source: OECD Economic Outlook 101 Database; and Ministry of Finance.

7. Growth is fastest in the OECD
7
• due to boom in tourism and favourable terms
of trade
75
100
125
150
175
200
225
250
275
300
2010 2011 2012 2013 2014 2015 2016 2017
Exports are boosted
by the tourism boom
Exports of goods
Exports of services
Exports of tourism
Index 2010 = 100, 4-quarter moving average
30
50
70
90
110
130
150
2010 2011 2012 2013 2014 2015 2016 2017
Terms of trade have been favourable
Brent oil prices (in USD)
Marine product prices (in foreign currency)²
Index 2010 = 100
Source: OECD Analytical Database; Statistics Iceland; Central Bank of Iceland.

8. Unemployment and inflation are low
8
0
1
2
3
4
5
6
7
8
9
2005 2007 2009 2011 2013 2015 2017
%
Unemployment
Unemployment rate
0
1
2
3
4
5
6
7
8
2010 2011 2012 2013 2014 2015 2016 2017
Inflation
Inflation Inflation target
%
Source: OECD Analytical Database.

9. Preserving macroeconomic stability
9

10. Rapid growth brings challenges
10
• overheating and inflationary pressures
90
100
110
120
130
140
150
2005 2007 2009 2011 2013 2015 2017
Wages, house prices
and domestic demand
Real house prices Real wages Final domestic demand
Index 2010 = 100
Source: OECD Economic Outlook 101 Database and Statistics Iceland.

11. Fiscal policy has been too expansionary
11
-6
-4
-2
0
2
4
6
2005 2007 2009 2011 2013 2015 2017
Fiscal stance is expansionary
Fiscal easing (+) / tightening (-)
% pts of potential GDP
Note: based on changes in underlying primary balance of general government.
Source: OECD Economic Outlook 101 Database.

12. Strong and volatile króna poses challenges for
many businesses
12
The króna has appreciated strongly since 2013
Broad trade index
Source: Central Bank of Iceland.
50
75
100
125
150
175
200
225
250
50
75
100
125
150
175
200
225
250
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Central Bank of Iceland.

13. Inflation expectations are better anchored
13
• but based on past experience could become de-
anchored again
0
1
2
3
4
5
6
7
0
1
2
3
4
5
6
7
2010 2011 2012 2013 2014 2015 2016
Inflation expectations
1-year breakeven inflation rate 5-year / 5-year forward inflation rate
Inflation target
Source: Central Bank of Iceland.

14. Recommendations for macroeconomic stability
1. Monetary policy should be ready to tighten, if inflation
expectations increase once again.
2. Smooth excess short-term exchange rate volatility. Use
macro-prudential tools to manage potentially destabilising
short-term capital flows.
3. Fiscal policy should be contractionary to reduce the risk of
overheating.
4. A sovereign wealth fund should be established and built up
over time. Funds should be invested abroad and draw down
limited to counteracting substantial shocks.
14

15. Making tourism sustainable and
inclusive
15

16. Tourism has recorded spectacular growth…
16
International tourist numbers have risen dramatically
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
1949 1954 1959 1964 1969 1974 1979 1984 1989 1994 1999 2004 2009 2014
MillionMillion
Source: Icelandic Tourist Board.

17. … and has become a major export earner
17
Tourism is now a major export earner
Share of goods and services exports, %
Source: Statistics Iceland.
• And created many jobs 0
10
20
30
40
50
60
0
10
20
30
40
50
60
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
%%
Marine Energy intensive Tourism
Source: OECD Analytical Database.

18. It also creates challenges – pressures on society
18
House prices have risen and affordability can be a challenge
32
33
34
35
36
37
38
39
40
41
OECD avg. Iceland
Rent expenditure
% of disposable income in the bottom quintile of
the income distribution
Source: OECD Affordable Housing Database and OECD Analytical database.
90
100
110
120
130
140
150
160
2006 2008 2010 2012 2014 2016
House price
Real house price
Index 2010 = 100

19. Environment needs to be preserved
19
Most visitors come to experience nature
% of respondents noting different reasons for visiting Iceland
0 10 20 30 40 50 60 70 80
Nature
Always wanted to visit
Attractive price or low airfare
Culture/history
Birthday or other special event
Spa & welness
Stopover
Work related
Friends/relatives
Other
Source: Icelandic Tourist Board Ferdamalastofa (2016).

20. Recommendations for sustainable tourism
1. Establish an inter-ministerial tourism strategy focused on
making tourism environmentally, socially and economically
sustainable. Include non-government stakeholders.
2. Remove current tax subsidies for tourism-related activities,
by taxing them at the standard VAT rate and broadening the
base to excluded services.
3. Limit the number of visitors to fragile sites.
4. Introduce user fees to manage congestion and pressure on
the environment.
20

21. Recommendations for sustainable tourism
5. Subject infrastructure investment to cost-benefit analysis,
including consideration of social and environmental
impacts.
6. Ensure transport and tourism policy are consistent.
7. Improve the economic analysis of tourism activity, with
better data and research.
8. Use vocational and on-the-job training to build skills in the
tourism workforce.
21

22. Effective and inclusive labour
relations
22

23. Labour market is flexible and inclusive
23
• Participation is high and unemployment low
0 20 40 60 80 100
BEL
POL
ITA
HUN
SVN
FRA
GRC
LUX
ISR
PRT
TUR
FIN
SVK
IRL
CHL
USA
KOR
LVA
OECD
AUT
EST
NOR
ESP
CZE
DNK
CAN
MEX
DEU
AUS
GBR
SWE
NZL
NLD
JPN
CHE
ISL
Participation rates of men
% of 15-64 year-old, 2015
0 20 40 60 80 100
TUR
MEX
ITA
CHL
KOR
GRC
POL
HUN
IRL
BEL
OECD
SVK
LUX
CZE
JPN
USA
FRA
SVN
ISR
ESP
PRT
AUT
AUS
GBR
LVA
EST
DEU
NZL
CAN
FIN
NLD
DNK
NOR
CHE
SWE
ISL
Participation rates of women
% of 15-64 year-old, 2015
Source: OECD Labour Force Statistics.

24. Iceland is highly unionised
24
0
10
20
30
40
50
60
70
80
90
100
0
10
20
30
40
50
60
70
80
90
100
EST
TUR
HUN
KOR
USA
FRA
CZE
POL
LVA
MEX
SVK
CHL
CHE
ESP
AUS
OECD
JPN
NLD
DEU
NZL
PRT
SVN
GRC
ISR
GBR
CAN
IRL
AUT
LUX
ITA
NOR
BEL
FIN
DNK
SWE
ISL
%%
Union density
2015 or latest year available
Source: OECD Analytical Database.

25. There are recurrent bursts of social tensions
25
Real wages
• Large wage awards hurt competitiveness
90
100
110
120
130
140
150
160
170
1989 1992 1995 1998 2001 2004 2007 2010 2013 2016
Index 1995 = 100
50
75
100
125
150
175
200
1994 1997 2000 2003 2006 2009 2012 2015
Relative unit labour costs
Iceland
Denmark
Finland
Norway
Sweden
Index 2010 = 100
Source: Statistics Iceland; and OECD Analytical Database.

26. Trust has been undermined
26
1
5
9
13
17
21
25
29
2007 2009 2011 2013 2015
Trust in politicians¹ has been
significantly undermined
DNK FIN NOR SWE ISL
OECD ranking
5.0
5.2
5.4
5.6
5.8
6.0
6.21
3
5
7
9
11
13
2007 2009 2011 2013 2015
Labour-employer relations² have
deteriorated in relative terms
Ranking (left) Score (right)
OECD ranking Score
Source: World Economic Forum. The Global Competitiveness Index dataset 2007-2016.
1. Business executives responding to the question: ‘in your country, how do you rate the ethical standards of politicians? [1 = extremely low;
7 = extremely high]’.
2. Business executives responding to the question: ‘in your country, how do you characterize labour-employer relations? [1 = generally
confrontational; 7 = generally co-operative]’.

27. Recommendations for effective collective
bargaining
1. To nurture trust all parties need to participate actively in the
Macroeconomic Council.
2. Establish a tripartite technical committee to provide reliable
and impartial information to wage negotiators.
3. Wage negotiations should begin with an agreement on
“wage guidelines” for the negotiation round. State mediator
(and arbitration bodies) should also base their proposals on
these guidelines.
4. Increase the powers of state mediator, including the power
to delay industrial action for a limited period in agreement
with the social partners, in an effort to achieve a negotiated
agreement.
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28. More Information…
www.oecd.org/eco/surveys/economic-survey-iceland.htm
OECD
OECD Economics
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