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).
19
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
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. 27
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