Presentation of the 2017 OECD Economic Survey of Iceland

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

OECD Economics OECD

Iceland has made a remarkable turnaround Index 2010 = 100 130 125

Real GDP levels Iceland

Nordics (excl. Iceland)

EU South (ESP, ITA, GRC, PRT)

Index 2010 = 100 130 125

120

120

115

115

110

110

105

105

100

100

95

95

90

2005

2006

2007

2008

Source: OECD Analytical Database.

2009

2010

2011

2012

2013

2014

2015

2016

2017

90

2

Well-being is high Indicators of well-being in Iceland 20% bottom performers

60% middle performers

20% top performers

Country rankings (1 to 35)

Work-Life Balance

Education

Iceland Country rankings (1 to 35)

Housing

Civic engagement

Source: OECD Better Life Index 2016.

Income

Health

Safety

Life Community Environment Satisfaction

Jobs

3

Iceland is highly inclusive and egalitarian Gini of disposable income

0.5

0.5

0.4

0.4

0.3

0.3

0.2

0.2

0.1

0.1 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

0

Score 1

Global Gender Gap Index

Score ranges from 0 (inequality) to 1 (equality), 2016

0

Score 1 0.8

0.6

0.6

0.4

0.4

0.2

0.2

0

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

0.8

Source: OECD Income Distribution Database; and the World Economic Forum.

0

4

Major imbalances have been corrected Current account and the Net International Investment Position % of GDP 10

Leverage has been reduced % of GDP 50

5

25

0

0

-5

-25

-10

-50

-15

-75

-20

-100

-25

-125

Underlying current account balance² (lhs) Current account balance (lhs) NIIP (rhs) Underlying NIIP (rhs)

-30 -35 -40

2005

2007

2009

2011

2013

2015

-150 -175 -200

% 270

Households: debt to disposable income ratio (lhs)

% 100

Corporate: debt to total assets ratio (rhs)

250

90

230

80

210

70

190

60

170

50

150 2005

2007

2009

2011

2013

2015

40

• Capital controls have been essentially lifted Source: OECD Analytical Database; and Central Bank of Iceland.

5

Public debt is falling

Public debt has been reduced

% of GDP 120

Net debt

100

Gross debt

80 60 40 20 0

2005

2007

2009

2011

Source: OECD Economic Outlook 101 Database; and Ministry of Finance.

2013

2015

6

Growth is fastest in the OECD Exports are boosted by the tourism boom

Terms of trade have been favourable

Index 2010 = 100, 4-quarter moving average 300 Exports of goods 275 Exports of services 250 Exports of tourism

Index 2010 = 100 150

225

110

200

90

175 150

70 Brent oil prices (in USD)

125

50

100 75

130

Marine product prices (in foreign currency)² 2010 2011 2012 2013 2014 2015 2016 2017

30

2010 2011 2012 2013 2014 2015 2016 2017

• due to boom in tourism and favourable terms of trade Source: OECD Analytical Database; Statistics Iceland; Central Bank of Iceland.

7

Unemployment and inflation are low

% 9

Unemployment

% 8

8

Inflation

Inflation target

7

7

6

6

5

5

4

4

3

3

2

2 Unemployment rate

1 0 2005

Inflation

2007

2009

2011

Source: OECD Analytical Database.

2013

2015

1 2017

0

2010 2011 2012 2013 2014 2015 2016 2017

8

Preserving macroeconomic stability

9

Rapid growth brings challenges

Wages, house prices and domestic demand

Index 2010 = 100 150

Real house prices

Real wages

Final domestic demand

140 130 120 110 100 90 2005

2007

2009

2011

2013

2015

2017

• overheating and inflationary pressures Source: OECD Economic Outlook 101 Database and Statistics Iceland.

10

Fiscal policy has been too expansionary

Fiscal stance is expansionary % pts of potential GDP 6

Fiscal easing (+) / tightening (-)

4 2 0 -2 -4 -6

2005

2007

2009

2011

2013

Note: based on changes in underlying primary balance of general government.

Source: OECD Economic Outlook 101 Database.

2015

2017

11

Strong and volatile krรณna poses challenges for many businesses The krรณna has appreciated strongly since 2013 Broad trade index 250

250

225

225

200

200

175

175

150

150

125

125

100

100 Source: Central Bank of Iceland.

75

75

50

50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Central Bank of Iceland.

12

Inflation expectations are better anchored Inflation expectations 1-year breakeven inflation rate

7

5-year / 5-year forward inflation rate

7

Inflation target

6

6

5

5

4

4

3

3

2

2

1

1

0

2010

2011

2012

2013

2014

2015

2016

0

• but based on past experience could become deanchored again Source: Central Bank of Iceland.

13

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

Making tourism sustainable and inclusive

15

Tourism has recorded spectacular growth‌ International tourist numbers have risen dramatically Million 2.00

Million 2.00

1.75

1.75

1.50

1.50

1.25

1.25

1.00

1.00

0.75

0.75

0.50

0.50

0.25

0.25

0.00

1949

1954

1959

1964

Source: Icelandic Tourist Board.

1969

1974

1979

1984

1989

1994

1999

2004 2009

2014

0.00

16

‌ and has become a major export earner Tourism is now a major export earner Share of goods and services exports, %

%

%

60

60 Marine

Energy intensive

Tourism

50

50

40

40

30

30

20

20 Source: Statistics Iceland.

10 0

10

• And created many jobs 1990

1992

1994

1996

Source: OECD Analytical Database.

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

0

17

It also creates challenges – pressures on society House prices have risen and affordability can be a challenge House price

Rent expenditure

41

% of disposable income in the bottom quintile of the income distribution

40

Index 2010 = 100 160 150

39

140

38 37

130

36

120

35

110

34

100

33 32

Real house price

OECD avg.

Iceland

90

2006

Source: OECD Affordable Housing Database and OECD Analytical database.

2008

2010

2012

2014

2016

18

Environment needs to be preserved 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).

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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.

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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

Effective and inclusive labour relations

22

Labour market is flexible and inclusive Participation rates of men

Participation rates of women

% of 15-64 year-old, 2015

ISL CHE JPN NLD NZL SWE GBR AUS DEU MEX CAN DNK CZE ESP NOR EST AUT OECD LVA KOR USA CHL IRL SVK FIN TUR PRT ISR LUX GRC FRA SVN HUN ITA POL BEL 0

20

40

60

% of 15-64 year-old, 2015

ISL SWE CHE NOR DNK NLD FIN CAN NZL DEU EST LVA GBR AUS AUT PRT ESP ISR SVN FRA USA JPN CZE LUX SVK OECD BEL IRL HUN POL GRC KOR CHL ITA MEX TUR 80

100

0

20

40

60

80

100

• Participation is high and unemployment low Source: OECD Labour Force Statistics.

23

Iceland is highly unionised

Union density

2015 or latest year available

% 100

% 100 90

80

80

70

70

60

60

50

50

40

40

30

30

20

20

10

10

0

0

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

90

Source: OECD Analytical Database.

24

There are recurrent bursts of social tensions

Index 1995 = 100 170

Real wages

160 150

Relative unit labour costs

Index 2010 = 100 200 Iceland Denmark Finland 175 Norway Sweden 150

140 130

125

120

100

110 75

100 90 1989 1992 1995 1998 2001 2004 2007 2010 2013 2016

50 1994

1997

2000

2003

2006

2009

2012

2015

• Large wage awards hurt competitiveness Source: Statistics Iceland; and OECD Analytical Database.

25

Trust has been undermined Trust in politicians¹ has been significantly undermined

Labour-employer relations² have deteriorated in relative terms

OECD ranking

OECD ranking

1

Score

1

6.2 Ranking (left)

5 9

Score (right)

3

6.0

5

5.8

7

5.6

9

5.4

11

5.2

13 17 21 25 29

DNK 2007

FIN 2009

NOR 2011

SWE 2013

ISL 2015

13

2007

2009

2011

2013

2015

5.0

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]’.

Source: World Economic Forum. The Global Competitiveness Index dataset 2007-2016.

26

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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More Information‌ Disclaimers: The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of international law.

This document and any map included herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and to the name of any territory, city or area.

www.oecd.org/eco/surveys/economic-survey-iceland.htm

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