Icelandic Economic and Fiscal Situation. August 2017

Transcription

1 Icelandic Economic and Fiscal Situation August 7

2 Key points The economy has continued its strong rebound (GDP growth exceeded 7 in 6) Two major contributors terms of trade and tourism Solid internal and external balance Inflation under the ½ target for over three years - inflation expectations also at the target Responsible fiscal consolidation and fiscal framework Steep decline in debt ratio Credit ratings rising - Return to an A-rating category in Sept 6 Well capitalized banking system - capital ratios remain above 5 Successful removal of capital controls Continued favorable economic prospects

3 Strong growth GPD growth (6) 7. Unemployment (May) 5.3 Inflation, CPI in July 7:.8, HPI in June 7: -.6 Positive current account balance,8 million foreign visitors to Iceland in 6 GDP per capita, USD PPP Iceland EU Harmonized price Index (HPI) Iceland EES Real GDP Source: OECD 3

4 Recent developments, year over year GDP Q Q3 3Q 3Q3 Q Q3 5Q 5Q3 6Q 6Q3 7Q Inflation CPI CPI less housing cost CB Target Private consumption Q Q3 3Q 3Q3 Q Q3 5Q 5Q3 6Q 6Q3 7Q Real wages

5 Forecasts Inflation IMF and OECD published new forecasts for Iceland in June 7 Statistic Iceland assumes the real GDP growth to be 6. in 7 and 3.3 next year Inflation is expected to exceed the inflation target in 8 but inflation is expected to stay low SI may CB may IMF OECD, Central Bank, IMF, OECD 7 6 Real GDP growth Unemployment SI may CB may IMF OECD SI may CB may IMF OECD, Central Bank, IMF, OECD 5, Central Bank, IMF, OECD

6 International comparison In 6 Iceland was the fasted growing economy among the OECD countries Iceland has the highest participation rate in the labour market, both among men and women Unemployment rate was around 3 in 6 and is expected to stay low GDP growth in 6 RUS GRC ITA NOR FRA BEL SWI DEN FIN PRT CAN USA OECD UK GER NLD TUR SWE ESP IRL ISL Labour force participation rate, 5-6 year olds 5 Unemployment rate, 5-6 year olds Source: OECD TUR ITA BEL GRC IRL FRA OECD USA PRT RUS ESP FIN GER CAN UK NOR NLD DEN SWE SWI ISL Source: OECD ISL GER NOR USA UK SWI RUS NLD DEN OECD CAN SWE BEL IRL FIN FRA TUR PRT ITA ESP GRC 6 Source: OECD

7 Population Total population January, 7: 338,39 Life expectancy (6): Men: 8.7, women: 83.7 In 7 there are 3.75 foreign citizens in Iceland, thereof 3,795 from Poland In 6,,873 people with Polish citizenship immigrated to Iceland, Polish citizens were also the largest group of foreign nationals to emigrate from Iceland in 6, or,7. In the st quarter of 7,,79 foreign citizens immigrated to Iceland and 6 emigrated Icelandic population Total inhabitants (right-ax) of foreign citizens Net immigration (numbers) Foreign citizens (numbers) Icelandic citizens Foreign citizens Total Immigration Emigration 7

8 Private consumption Substantial private consumption growth since 3 As a share of GDP, private consumption is still well below its long term average Number of Icelanders traveling abroad has increased, especially since 5 Robust growth in domestic debit- and credit card usage so far in 7 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 7 Forecast Privat consumption, of GDP Average (-6) Y-on-Y change (r.ax) Number Depart. of Icelandic passengers from Keflavík Airport Janjuly 7 Source: 8 Icelandic Tourist Board

9 Housing market Turnover in the real estate market has risen, and residential housing prices have increased far in excess of the general price level. Prices have risen sharply in the recent term because new construction has been unable to keep pace with demand stemming from population growth and the tourism boom. Prices are now high in historical context and appear to have risen in excess of wage growth in the past few months. Index, Jan. = 8 6 House prices Real housing prices House prices to wages House prices to building cost Billion ISK New mortgages by lender Banks Pension Funds HFF Total Building of residential property Number Started Finished Source: 9 Federation of Icelandic Industries

10 Investment Million ISK. Investment in the tourism industry Fixed prices. Business sector investment has risen as a share of GDP in the last two years Lending to tourism companies has increased markedly in the recent past, in line with increased investment in the sector. At the end of 6, 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

11 External position The real exchange rate in terms of relative consumer prices has risen sharply from the autumn 9. The increase has continued so far in 7, with the real exchange rate about a fifth above its twenty-five year average in Q. The rise is due for the most part to the nominal appreciation of the króna Iceland s net international investment position (NIIP) has improved substantially in the recent term and is now positive by. of GDP = 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

12 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. Exports of goods and services combined rose by over in 6 The surplus of balance of trade in goods and services in 6 was 58,836 million ISK Tourism 38 Total export of goods and services by type 7, q Other goods and service sectors 9 Marine Products 6 Other Manufactured Goods and Products 7 Aluminium and Ferrosilicon 5 = Millions, ISK Export prices and terms of trade Export prices Balance of trade, quarterly figures Balance of trade in goods Terms of trade Balance of trade in services

13 Debt levels Total household debt continues to decrease, debt has not grown in line with increases in housing prices Household debt was reduced by 33 b.kr. in 6 in connection with the Government s debt relief measures Loans to tourism companies account for around of the commercial banks total corporate lending. of GDP Corporate debt, international comparison Iceland Denmark Finland Sweden Norway Ireland of GDP 8 6 Total household debt Indexed Non-Indexed Asset financing agreements Exchange rate-linked Overdraft of GDP Corporate debt

14 Labour market foreign labour Unit labour cost and productivity year on year change Labour cost Productivity 8 6 Unemployment Statistics Iceland Forecast of potential of labour Unemployment and output gap force Output gap (left axis) Unemployment rate (right axis) Real wages Real wages Inflation Wages

15 Labour market foreign labour From the year 996, 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 6 there were.73 foreigners in the workforce,,3 of the labour market Labour force (numbers) Unemployment, foreign citizens ( of total) Icelandic citizens Foreign citizens (r-axis) Source: Directorate of Labour Source: Directorate of Labour 5

16 Gini coefficient in selected OECD countries 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 in the case of perfect inequality. With a Gini coefficient of., Iceland s income inequality after government taxes and transfers is the lowest among OECD countries.,5,5,,35,3,5,,5,,5, Gini coefficient, or the latest Source: OECD 6

17 Tourism The total number of foreign visitors to Icelands was around,8 million in 6 That is a 39 increase from 5 In the first 5 months of 7 the increase is 6,5 Higher growth in the winter months than summer The appreciation of Krona might shorten the dwelling time and cause less spending Foreign Passengers through Keflavik Airport 6 Canada 5 Denmark 3 Sweden 3 Germany 8 China France 5 Norway 3 UK 8 Poland Spain Other 5 USA 3 Thous Foreign tourists in Iceland Number of foreign tourists change between years (r. Ax) Source: Icelandic Tourist Board Thous. 3 Foreign arrivals in Keflavik 5-7 (monthly figures) jan apr jul oct jan apr jul oct jan apr jul Foreign tourists Year over year (r-ax) 8 7 Source: Icelandic Tourist Board

18 Tourism Overnight stays in hotels increased by 6 in June, year on year. In the first six months of 7 the overnight stays increased by 8 The occupancy rate stays high, especially in the capital area Thous. 5 3 Hotel nights in Iceland (jan-dec) Occupancy rate of hotel rooms 3-7 jan apr jul oct jan apr jul oct jan apr jul oct jan apr jul oct jan apr Total Capital area Millions ISK Credit card usage of foreign tourists Hotels Restaurants Car rentals Shops 8 Source: Center for Retail Studies

19 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 9

20 Aluminium sector Tonnes. Production and electricity consumption, monthly figures Gwh.5 Aluminium exports account for of total. exports of goods and services 6. There are three aluminium smelters in Iceland,. Alcoa (East Iceland), Century Aluminium (West 5 Iceland) and Rio Tinto Alcan (South Coast Iceland). Production of aluminium started in Iceland in 969 in Straumsvík (South Coast). During the first year, the production capacity was 33 thousand tonnes Aluminium production The capacity today for all three smelter is around Electricity consumption - Power intensive industry (r-axis) 85 thousand tonnes per year 8. USD/tonnes 3.5 Prices of aluminium (LME), monthly figures Millions, ISK 3. Exported aluminium and aluminium products

21 Energy consumption 8 renewable Petajoule Gross energy consumption by source Hydro energy Geothermal energy Oil Coal Source: National Energy Authority 8 6 Gross energy consumption by source Hydro energy Geothermal energy Oil Coal Source: National Energy Authority 5, 3, Division of electricity sales, 6, 8, 3,, 3, ALCOA Rio Tinto Alcan Century Aluminium Other wholesale buyers Elkem Becromal Landsnet Electricity consumption 6 by Utilization Category Services Other industries Residential Utilities Agriculture Fisheries Heavy industry Source: Landsvirkjun Source: National Energy Authority

22 Monetary policy The Monetary Policy Committee of the Central Bank of Iceland lowered the Bank s interest rates by.5 percentage points in June. The Bank s key interest rate the rate on seven-day term deposits, are now,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 Billion ISK , CBI's net purchase, ISK mill. Cumulative purchases of the Icelandic Central bank (r-ax)

23 Exchange rate The króna appreciated 8 in 6 The króna continued to appreciate in the first quarter of 7 but the strengthening of the króna has reversed and the exchange rate index in August is now similar as it was in the beginning of 7 Exchange rate Index (narrow trade index) Exchange rate USD.ISK EUR.ISK GBP.ISK 3

24 5,, Interest rates The spread between long-term interest rates in the US and the UK has grown wider The yields on indexed and nominal bonds have fallen The decline in bond yields appear to reflect market agents reduced inflation expectations and their expectations of a lower key rate -year government bond yields in selected industrialised countries 9, 8, 7, Nominal and indexed bond yields 3,,,, -, US Germany UK Japan 6, 5,, 3,,,,

25 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 Default ratios Denmark Capital adequacy ratios 5 Norway Greece Hungary Iceland, Book value Iceland, Claim value Ireland Lithuania Arion Bank Íslandsbanki Landsbankinn Spain Kvika banki 5

26 Debt Management 7- Proceeds from stability contributions used to pay down debt o The budget 7 assumes that 5 bn. ISK will be used to pay down debt o Plans are subject to the sale of 87 share in Arion bank takes place this Treasury ISK deposits in Central bank reduced o Deposit levels reduced to bn. ISK last fall when active liquidity managment implemented Irregular revenues dividends, proceeds from asset disposal o During the period, irregular income of bn. ISK is assumed to be used to retire debt Central Bank bond fully repaid in 7 Outstanding amounts of RIKH 8 og RIKB 9 reduced by switch auctions and buy-backs Gross central government debt ratio peaked in 86 of GDP in, the ratio was down to 7 at end of 6 GDP growth and debt repayments are the contributing factors in lowered debt levels At the end of forecast period total debt is expected at 838 bn. ISK 5 af VLF Bn.ISK of GDP Source: Ministry of Finance and economic 6 affairs

27 ACT ON PUBLIC FINANCES - STRENGHTENS THE FISCAL FRAMEWORK New Act on Public Finances came into force. January 6. The architecture involves i.a. three main documents: Five-year Fiscal Policy Statement, a parliamentary resolution submitted every five years. When new Government takes office, it has to publish a new policy statement and strategy for the next 5 years, as soon as possible Fiscal Strategy for the next five years, a parliamentary resolution submitted every year. Budget Bill (submitted every year) The Policy Statement and the Strategy reflects the Government s objectives and emphasis concerning the economic policy effect of public finances, tax policy, and prioritization of spending. The five year Fiscal Policy Statement for this Government was approved in April 6. The Fiscal Strategy was approved in May 6. 7

28 Total outcome General government Stability contributions and other irregular income included of GDP General government Total outcome Fiscal rule (-,5 of GDP) Source: Ministry of Finance and economic affairs 8

29 Fiscal strategy plan 7- Central Government balance Excluding irregular items such as revenues from stability contributions of GDP Central government of GDP Total balance (r-ax) Revenue Expenditure - Source: Ministry of Finance and economic affairs 9