Iceland: New era of financial stability amid concerns of an overheating economy

Growth momentum fueled by tourism activity

Real GDP rose by +7.4% in 2016, fueled by surging investment (+22.8%) and strong private consump-tion (+7.1%) on the back of large wage rises (+8%). The latter combined with low unemployment (3% in 2016) has raised concerns of an overheating of the economy. So far, the +16% appreciation of the króna (ISK) against the EUR in 2016 (followed by stabilization in 2017), strong terms of trade and profit margin compression have lowered the pass-through from wages to consumer prices. But headline inflation is expected to exceed the Central Bank of Island’s (CBI) 2.5% inflation target in 2018.