Iceland Country Risk Report Q4 2019
We continue to believe that the Icelandic economy will contract in 2019 as a whole despite a return to positive growth in Q219. Private consumption growth is likely to soften over the coming quarters as a sharp slowdown in business investment filters through to job creation and wage growth. This relatively tepid outlook for private consumption, coupled with ongoing issues for major airlines serving the country, have led us to decrease our real GDP growth forecast for 2020.
An upcoming visit by US Vice President Mike Pence to Iceland has highlighted the ideological and policy differences between the largest parties in Iceland's coalition government. A rapidly cooling economy is likely to further stoke tensions in the coalition given a likely divergence in how to tackle the slowdown. Against this backdrop, we reiterate our view that the coalition government is unlikely to last its full term to 2021.
Major Forecast Changes
We now see the economy growing by 2.0% in 2020, down from a previous estimate of 2.6%.
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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