Iceland: Imbalances remain
There are increasing signs that a change in foreign investor sentiment early this year and further policy tightening have set in motion an overdue adjustment process. The economy is projected to contract in the next few quarters. Nonetheless, economic imbalances will remain substantial for some time. The challenge for policymakers will be to ensure that steady progress is made in unwinding these before any renewed financial market nervousness complicates an orderly adjustment.
Further monetary tightening is likely to be needed in the near term both to return inflation to target and anchor expectations there. Fiscal policy should avoid rekindling demand pressures, offsetting the expansionary effect of announced tax cuts by additional spending restraint so long as there is no clear evidence that the economy has cooled down.
|Population (000s), 2005||296|
|Area (000 sq km)||103|
|GDP (Billion USD), 2005||10.6|
|Life expectancy at birth (Women, Men), 2004||82.7, 79.2|
|Total labour force (000s), 2005||166|
|Government type||Constitutional Republic|
|Indicators||% change unless otherwise indicated|
|Consumer price index||6.8||3.7||2.7|
|Unemployment rate (%)||2.8||2.5||3.0|
|General government financial balance|
|Current account balance (% GDP)||-20.6||-13.9||-7.8|
No. 258/259, December 2006