Signs of Iceland’s economy overheating

Recession, inflation and unemployment are just some of the consequences of a possible ‘overheating’ of the Icelandic economy.

A new economic forecast for 2015-17 by major Icelandic bank Íslandsbanki suggests there is a danger the Icelandic economy might overheat by 2017, and that signs have already appeared in certain sectors.

Economic overheating occurs when domestic demand for goods and services outstrips production capacity, leading producers to raise prices. Unaffordable wage rises are also part of the Icelandic equation, according to the Íslandsbanki report.

Iceland is no stranger to the negative effects of an overheating economy – recession, a falling króna, inflation, unemployment, reduced purchasing power, to name but a few.

Growth was historically moderate in the early years of Iceland’s latest boom, but has accelerated in 2015. Íslandsbanki forecasts economic growth of 4.3% this year and 4.4% next year, falling to 2.5% in 2017.

The report suggests signs of ‘overheating’ are already visible in, for instance, the labour and property markets. Íslandbanki predicts rapid rises in wages and property prices ahead.

It is unsure to what extent businesses will be able to rationalise to cover the costs of wage rises, and may need to raise prices instead. In the short-term, this will be absorbed by the strong króna and cheaper imports, but inflation could exceed targets by 2017.

The full Íslandsbanki report (in Icelandic) is attached below.

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