Icelandic Economic Situation. September 2018

Transcription

1 Icelandic Economic Situation September 18

2 Key points Expecting soft landing of economic growth Major contributor is private consumption but investment, export and public consumption contribute to the growth as well Solid internal and external balance Inflation three times above the ½ target since January 1 Responsible fiscal consolidation and fiscal framework Steep decline in debt ratio Credit ratings rising - Return to an A-rating category in Sept 16 Well capitalized banking system - capital ratios remain above 5 Successful removal of capital controls Continued favorable economic prospects

3 Growth is slowing down GPD growth (17) 3.6 Unemployment (July 18).5 Inflation, CPI in August 18:.6. HPI in June 18: 1. Positive current account balance. millions foreign visitors to Iceland in 17 GDP per capita, USD PPP Iceland EU 8 1-month change () Volume change () Harmonized price Index (HPI) Iceland Real GDP EEA Forecast Source: OECD

4 Recent developments, year over year GDP Private consumption Q1 1Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3 18Q1 Inflation 1Q1 1Q3 15Q1 15Q3 16Q1 16Q3 17Q1 17Q3 18Q1 Real wages CPI CPI less housing cost CB Target

5 Combination of GDP Proportion of GDP Private consumption is expected to be the driving force for economic growth in the coming years, as well as investment and public consumption The share of tourism in GDP has grown year by year since The share of tourism in 16 exceeded the share of fishing and fish processing in GDP. However, the fishing sector has not decreased, but GDP has increased due to the increase in tourism Tourism Fishing and fisk processing 1 Contribution to economic growth Share of industries in GDP Information and communication Financial and insurance activities Education Fishing and fish processing Construction Human health and social work activities Production, other than fish processing Tourism Private consumption Public consumption Investment Wholesale and trade Changes in inventories Trade GDP

6 Forecasts The Central Bank forecasts GDP growth of 3.6 in 18, up.3 pp, from its May forecast Statistics Iceland projects GDP growth of.9 in 18 and.7 in 19 IMF and OECD published new forecasts for Iceland in the spring 18 Inflation is expected to exceed the inflation target in 18 except in the IMF forecast Inflation SI June CB August IMF OECD, Central Bank, IMF, OECD Real GDP growth Unemployment SI June CB August IMF OECD SI June CB August IMF OECD, Central Bank, IMF, OECD, Central Bank, IMF, OECD

7 Key economic indicators forecast published 1. June 18 Volume change on previous year, Private consumption 5,3 3,9 3,1,9,7,5 Public consumption,5,1 1,9 1,7 1,9 1,9 Gross fixed capital formation 3,,9 3,6 1,7, 3,5 Business investment -1,9 3,1 1,7 -,1 3,6 3,9 Housing investment,9 1, 8, 5,,8 3,6 Public investment 1,7 3,6 5,8,3-7,5 1,6 National expenditure, 3,8,9,,,5 Exports of goods and services 3,,7,6,6,6, Imports of goods and services 6, 5,1 3,,3,5 Gross domestic product,9,7,7,5,6,5 1

8 TUR ITA BEL GRC FRA OECD IRL USA RUS PRT ESP DEN FIN NOR GER CAN UK NLD SWE SWI ISL ISL DEN GER NOR USA UK NLD SWI RUS OECD CAN SWE IRL BEL FIN FRA PRT TUR ITA ESP GRC SWI GRC ITA JPN BEL UK FRA NOR GER DEN USA SWE OECD FIN PRT CAN ESP NLD ISL POL TUR IRL International comparison GDP growth in Iceland has been slowing in 17, but it is still well above the average in the OECD countries Iceland has the highest participation rate in the labour market, both among men and women Unemployment rate was around 3 in GDP growth 17 1 Labour force participation rate 17, 15-6 year olds 5 Unemployment rate 17, 15-6 year olds Source: OECD Source: OECD Source: OECD

9 Population Total population nd quarter 18: 353,7 Life expectancy (17): Men: 8.6, women: 83.9 In the nd quarter of 18 there are 1,8 foreign citizens in Iceland, 11,7 of the total population In the nd quarter of 18, 3,15 foreign citizens immigrated to Iceland and 1.1 emigrated Icelandic population Q Total inhabitants (right-ax) of foreign citizens Net immigration (numbers) Foreign citizens (numbers) Icelandic citizens Foreign citizens Total Immigration Emigration

10 Private consumption Substantial private consumption growth since 13 As a share of GDP private consumption is still well below its long term average Number of Icelanders traveling abroad has increased, especially since 15 Robust growth in domestic debit- and credit card usage 1 M.ISK Total turnover of credit and debet cards, domestic and abroad Turnover of credit and debet cards, abroad Turnover of credit and debet cards, domestic of GDP Private consumption Forecast Number Depart. of Icelandic passengers from Keflavík Airport Privat consumption, of GDP Average (3-17) Y-on-Y change (r.ax) Source: Icelandic Tourist Board

11 Housing market Turnover in the real estate market has risen, and residential housing prices have increased far in excess of the price level Factors contributing to price increases are substantial wage growth, low investment since the GFC and population growth Despite rising house prices, household credit growth has been moderate Index. Jan. 1 = Real house prices, building costs and purchasing power Building costs Real housing prices Purchasing power 1 Index Number House prices, income and credit in two house price cycles House prices Labour income Credit to households Building of residential property Started Finished Average finished apartments since 197 Source: Federation of Icelandic Industries

12 Investment Million ISK 15. Investment in the tourism industry Fixed prices. Business sector investment has risen as a share of GDP in the last years Lending to tourism companies has increased markedly in the recent years in line with increased investment in the sector At the end of 16, lending to the tourism industry accounted for 8.5 of loans granted to the private sector Total. (r-axis) 55 Hotels and restaurants 63 Supporting and auxiliary transport activties; activities of travel agencies Investment, share of GDP Business sector inv.m. Residential construction Government services Investment, share of the total Business sector inv.m. Residential construction Government services

13 External position The real exchange rate in terms of relative consumer prices has risen sharply from the autumn 9 However, there is still vast surplus on the current account (3,65 of GDP in 17), largely thanks to the development in tourism Iceland s net international investment position (NIIP) has improved substantially and currently stands at 9 of GDP =1 Real exchange rate, index Real exchange rate (prices) Real exchange rate (labour costs) Prices 5 year av. Labour cost 5 year av. of GDP Net international investment position (NIIP) of GDP Current account balance Trade account Services account Current account

14 Trade and terms of trade Terms of trade have improved markedly, and exports have grown rapidly The rise in the exchange rate is due largely to growth in tourism, considerably better terms of trade, and a substantial improvement in Iceland s external position The share of tourism in total exports of goods and services in 17 was The balance of trade surplus in 17 amounted to.1 of GDP Tourism Total export of goods and services by type 17 Other goods and service sectors 18 Marine Products 17 Other Manufactured Goods and Products 6 Aluminium and Ferrosilicon 17 1 Index 5 = Millions. ISK '1 '11 '1 '13 '1 '15 '16 '17 '18 Terms of trade for goods Balance of trade, quarterly figures Balance of trade in goods Terms of trade Terms of trade for goods and services, MB 18/ Balance of trade in services

15 Trade Income from foreign tourists in Iceland and abroad amounted to 95 b.kr. in the first quarter of 18, increasing by 5.5 in current prices from the same period the year before The service balance maintains the surplus on the current account The share of travel and transportation services in services exports was 8 in the first quarter of 18 1-month change () Growth in tourism export Current prices Constant exchange rate (18Q1) Billions ISK Billions ISK Service export, constant exchange rate (18Q1) Other Telec., computer and information services Travel Balance of trade Sercvice Primary income Manufactoring Current account balance and components constant exchange rate (17Q) Secondary income Current account Other business services Financial service Transport

16 Labour market Unit labour cost and productivity year on year change Labour cost Productivity, MB 18/3 of potential output - - Unemployment and output gap Output gap (left axis) Unemployment rate (right axis) of labour force, MB 18/ Unemployment and labour participation Labour participation - 1-month moving average Unemployment - 1-month moving average (R.ax) Real wages year on year change Real wages Inflation Wages 1 8 6

17 Labour market foreign labour From the year 1996, the highest numbers of foreign immigrants to Iceland were Polish citizens, with the exception of, when Portuguese citizens were most numerous At the end of 17 there were,3 foreigners in the workforce, 1. of the labour market The ratio of foreign citizens of total unemployment was 6 at the end of 17 Labour force (numbers) Unemployment, foreign citizens ( of total) Icelandic citizens Foreign citizens (r-axis) Source: Directorate of Labour Source: Directorate of Labour

18 Labour productivity From 1 overall productivity increases have been accelerating Increasing productivity have mainly been in construction, tourism and in the information and communications sector However, labour productivity is still somewhat lower than in the other Nordic countries Index 8=1 Labour productivity Agriculture, forestry and fishing Acommodation and food service activities Financial and incurance activities Construction Information and communication Total

19 Gini coefficient in Europe 16 The Gini coefficient is based on the comparison of cumulative proportions of the population against cumulative proportions of income they receive, and it ranges between in the case of perfect equality and 1 in the case of perfect inequality With a Gini coefficient of., Iceland s income inequality after government taxes and transfers is the lowest among the countries in Europe,5,,35,3,5,,15,1,5, Source: Eurostat

20 Tourism The total number of foreign visitors to Iceland was around. million in 17, that is increase from 16 Of foreign passengers traveling though Keflavik Airport Americans and Britons are the largest group, or 1 of all passengers in 17 The appreciation of Krona might shorten the dwelling time and cause less spending Foreign Passengers through Keflavik Airport 17 Canada 5 Netherlands Norway Italia Denmark Sweden 3 Germany 7 Spain 3 France 5 UK 15 Other 8 USA 6 Thous. Foreign tourists in Iceland Thous Foreign arrivals in Keflavik (monthly figures) Number of foreign tourists change between years (r. Ax) Source: Icelandic Tourist Board Foreign tourists Year over year (r-ax) Source: Icelandic Tourist Board

21 jan.13 apr jul oct jan.1 apr jul oct jan.15 apr jul oct jan.16 apr jul oct jan.17 apr jul oct jan.18 apr Tourism Overnight stays in hotels increased by in June, year on year and by 1 between 16 and 17 The occupancy rate of hotel rooms in June in the capital area was 8.8, a decrease of.7 percentage points from June last year when it was At the same time, the supply of accommodation in the capital area has increased by 5.5 measured in a number of rooms 1-month change () Occupancy rate of hotel rooms Total Capital area Thous. 5 Hotel nights in Iceland (jan-dec) Millions ISK. Credit card usage of foreign tourists Hotels Restaurants Car rentals Shops Source: Center for Retail Studies

22 Fishing sector Marine products have historically been the country s leading export items The fishing industry is one of the main pillars of the Icelandic economy Iceland maintains a nautical miles exclusive fishing zone, 7 times the area of Iceland itself A catch limitation system is the cornerstone of the Icelandic fisheries management system. The system is intended to limit the total catch and to prevent more fishing from the fish stocks than the authorities allow at any given time Million ISK Exported marine products, value Total Frozen Salted Fresh and chilled Meal/fish oil Million ISK Catch and value, monthly figures Thous. tons Value Catch (r. ax) Million ISK Financial accounts of fisheries Total assets Debts Equity

23 Aluminium sector Aluminium exports account for 17 of total exports of goods and services in 17 There are three aluminium smelters in Iceland, Alcoa (East Iceland), 1 Century Aluminium (West Iceland) and Rio Tinto Alcan (South Coast Iceland) Production of aluminium started in Iceland in 1969 in Straumsvík (South Coast). During the first year, the production capacity was 33 thous. tonnes The capacity today for all three smelter is around 85 thous. tonnes per year USD/tonnes. Prices of aluminium (LME). Monthly figures Tonnes Production and electricity consumption. monthly figures Millions. ISK 3. Gwh Aluminium production Electricity consumption - Power intensive industry (r-axis) Exported aluminium and aluminium products

24 Energy consumption 8 renewable Petajoule 3 Gross energy consumption by source 1 Gross energy consumption by source Hydro energy Geothermal energy Oil Coal Hydro energy Geothermal energy Oil Coal Source: National Energy Authority Source: National Energy Authority Division of electricity sales, 17. ALCOA 7 3. Rio Tinto Alcan 35 Century Aluminium 16 Other wholesale buyers Elkem 1 Becromal Landsnet 1 Electricity consumption 16 by Utilization Category Services Other industries Residential Utilities Agriculture Fisheries Heavy industry Source: Landsvirkjun Source: National Energy Authority

25 Monetary policy The Monetary Policy Committee (MPC) of the Central Bank of Iceland decided on 9th of August 18 to keep the Bank s interest rates unchanged. The Bank s key interest rate the rate on seven-day term deposits, are.5. The Central Bank has scaled down its intervention in the foreign exchange market in view of its strong foreign exchange reserves, as the appreciation of the króna is considered to reflect economic fundamentals. As before, the Bank will intervene in the market in order to mitigate volatility when it considers such intervention warranted 6, 5,75 5,5 5,5 5,,75,5,5, Central Bank s key interest rate Million ISK Interventions in the foreign exchange market CBI's net purchase, ISK mill. Cumulative purchases of the Icelandic Central bank (r-ax) Billion ISK

26 Exchange rate The króna appreciated steadily in the wake of capital controls alongside a large inflow of capital, but from the middle of 17 there has been a reversal. In August the exchange rate of the Icelandic króna was similar to the beginning of the year Exchange rate Index (narrow trade index) Exchange rate of foreign currencies against the króna USD.ISK EUR.ISK GBP.ISK

27 5 3 1 Interest rates Long-term interest rates have risen in US and the interest rate differential vis-á-vis other advanced countries has widened Yields on indexed Treasury and Housing Financing Fund (HFF) bonds have been fallen since the second half of 16 Nominal Treasury bond yields began to rise late in 17, followed by a rise in the breakeven inflation rate in the bond market 1-year government bond yields in selected industrialised countries US Germany UK Japan Nominal and indexed bond yields Nominal 16 Nominal 19 Nominal Nominal 5 Nominal 31 Indexed 1 Indexed Indexed

28 Households debt levels Total household debt as a percentage of GDP has declined steadily from 9 until the second half of 16. Household debt has not grown in line with the rise in property prices The share of non-indexed mortgages from new lending by DMBs has increased again Household debt as a ratio of disposable income has declined considerably from 1 and the ratio amounted to 15 at the end of 17 of GDP of GDP Total household debt Indexed Non-Indexed Asset financing agreements Households debt as of GDP Exchange rate-linked Overdraft of disposable income Iceland Denmark Sweden Holland Ireland Norway of disposable income

29 Corporate debt levels of GDP 5 Corporate debt. international comparison Corporate debt has decreased steadily from 9 to 16 but in 17 the corporate debt increased by.7 in real terms At the end of 17, lending to tourism companies amounted to 9 of total lending by the major commercial banks The financial position of companies in 16 is strong according to Statistics Iceland's data on business performance Number of companies in the default register have decreased in recent years of GDP 5 15 Iceland Denmark Sweden Finland Ireland Norway Corporate debt

30 The financial system The three largest commercial banks are considered resilient with strong capital and liquidity positions Profitability, outside of irregular items, has been low 1 Two of the largest banks are majority owned by the state The Treasury has sold its 13 stake in Arion Bank on the basis of purchase rights to the holding The five-year Fiscal Strategy Plan for 18-3 assumes 158 bn ISK in dividends The successful IPO of Arion bank is considered essential to re-establishing trust in the system The state s current ownership policy of financial institutions is to sell the 13 share in Arion and all holdings in Íslandsbanki while reducing the share in Landsbanki to 35 to 1 of GDP Financial system, Assets as of GDP DMBs Pension funds HFF

31 Commercial banks Default ratios for households and business in Iceland have declined Capital position is strong and both capital and leverage ratios are high for the commercial banks in Iceland 3 Households and corporates default ratios 1 Iceland- Book value 35 Capital adequacy ratios of systemically important banks 1 5 Ireland 3 15 Latvia 5 1 Denmark Banks non-performing loans as a percentage of gross loan portfolio w/o write-downs. 17- Q3 figures for Denmark, Ireland and Greece and 17-Q figures for Norway.. 7: Figures estimated from the annual accounts of the failed banks. 8: Central Bank estimates. Norway Arion Bank hf. Íslandsbanki hf. Landsbankinn hf. 1. Capital base as of risk-weighted assets.. A dividend of 5 b.kr. that was paid in 18 has been taken into account for Arion Bank's end-17 capital ratio.

32 Pension funds Within capital controls the size of the pension funds in the domestic financial market grew. They own around 5 of stocks and are majority holders of gov t debt Pensions funds lending have grown enormously since 16, and their ratio of total lending to households now stands at 18, but at the beginning of the year 16 it was 1 Pension funds and third-pillar savings custodians foreign investment amounted to 119 bn ISK in 17, or,7 of GDP B.ISK Assets of pension funds B.kr. Pensions funds lending to households, fixed price June Domestic assets Foreign assets

33 Thank you for your attention