Iceland Country Risk Report Q3 2019
Although we are now expecting the Icelandic economy to contract in 2019 for the first time since the global financial crisis, we believe the downturn will be far less severe than the recession of 2009 and 2010. The main factors that will cause the economy to shrink are transient headwinds that will subside in 2020.
Furthermore, growth will remain supported by an increase in wages following an agreement between employers and trade unions, and by accommodative monetary policy.
We retain our view that the Icelandic grand coalition government is unlikely to last its full term despite successfully negotiating a collective wage agreement and approving a controversial abortion bill. There are several key challenges that remain including a potential re-emergence of the wage dispute and a vote on an EU energy package, which could lead to tensions between members of the coalition. These tensions could well be exacerbated if the two largest parties harden their respective positions amid signs of falling support according to recent opinion polls.
Major Forecast Changes
We now see the economy contracting by 0.2% in 2019, down from a previous estimate of positive growth of 1.9%.
The biggest risk to the Icelandic economy stems from the external environment amid global trade tensions and uncertainty over Brexit. There are also domestic risks stemming from ongoing wage negotiations and from the fragility of the grand coalition government.
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