Iceland: Strong growth as capital controls have been mostly lifted

​Real GDP continued to surge from +4.1% in 2015 to an average +6.1% y/y in Q1-Q3 2016, fuelled by soaring fixed investment (+27.4% y/y) and continued  strong private consumption (+6.7% y/y) on the back of large wage rises. Government consumption expanded by a more modest +1.1% y/y. Net exports made a negative contribution to Q1-Q3 growth as imports (+16.6% y/y) outpaced exports (+9.5% y/y). As growth was particularly strong in Q3 2016 (+10.2% y/y) in part due to calendar effects, Euler Hermes expects a slowdown in Q4 and full-year GDP to rise by about +5.2% in 2016. 

Against the background of surging wages (+8% in 2016 according to EU estimates) with a low unemployment rate at around 3.4%, the main challenge for Iceland is now perhaps to avoid a possible overheating of the economy. Euler Hermes expects some economic policy tightening and forecasts GDP growth to slow to around +3.5% in 2017 and +3% in 2018.