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Report: Iceland has technically entered recession but economic boom shows no signs of slowing

By Staff

  • At Gullfoss waterfall The awesome power of Icelandic nature generates growth both by powering industry and by drawing in crowds of foreign visitors. Photo/Pjetur.

Icelandic economists blast a recent report by the UK Financial Times, which claims Iceland has "dropped into its first recession since 2012".

"Seasonally-adjusted figures [show] that gross domestic product dropped 1.1 per cent in the three months to June, marking the second successive quarter of declines - the technical definition of a recession."

The Financial Times (subscription required) notes that seasonally adjusted figures for the first quarter showed GDP declined by 0.9% and that GDP shrunk by 1.1% in the second quarter. The FT did note that that this slowdown might be good news for Iceland, coming on the heels of the 7.4% growth in 2016, the second highest growth rate in the entire OECD.

Read more: Icelandic GDP grew more in 2016 than initially believed: Growth was 7.4%

Deeply flawed reading

Iceland in recession

Not so fast! Financial Times insists Iceland is in recession Photo/Financial Times, Screenshot

The head of National Accounts and Public Finance at Statistics Iceland, Björn Rúnar Guðmundsson, told the local newspaper Morgunblaðið that nobody who is familiar with the Icelandic economy would use seasonally adjusted quarterly figures in the way that Financial Times does. 

Icelandic economists who have commented on the Financial Times story, and the seasonally adjusted quarterly data from Statististics Iceland, agree. Friðrik Már Baldursson, a professor of economics at the University of Iceland told the local TV station Stöð 2 that while it is undeniable that the data shows the Icelandic economy is technically in a recession the economy shows zero signs of serious slowdown, let alone a recession. 

These figures, Björn argues, are highly problematic due to the large fluctuations and small size of the Icelandic economy. Economists therefore always look to other factors as well. Looked at in this broader context the data shows the Icelandic economy is still experiencing very robust growth. Other economists second this assessment.

Slower growth a good thing
Friðrik Már told Stöð 2 that the most recent national accounts data showed that economic growth was slowing down, which he pointed out was is a good thing. A developed economy at full employment could not sustain 7.4% GDP growth without serious overheating and dislocation. He said that there were no signs that the quarterly slowdown would lead to an actual economic contraction.

Read more: Iceland has the lowest unemployment rate in the entire OECD

GDP growth 2016
OECD GDP growth 2016 Iceland had the second highest growth rate in the OECD. The most recent National Accounts for 2016 show that growth was actually 7.4%, not 7.3% as initially believed. Photo/Iceland magazine/OECD

Methodology which only works for large economies

Seasonal adjustment of GDP figures is done to remove regular fluctuations which occur at the same time each year, due to things like weather and holidays. Seasonal adjustment is intended to ensure that the figures reflect true underlying patterns in economic activity.  

Using seasonally adjusted figures works well in large and highly diversified economies, Björn argues. The small size of the Icelandic economy and its strong seasonality, not least due to the importance of fisheries which are a seasonal industry, means quarterly figures are often unreliable. Björn also points out that the small size of the economy can lead to oversized effects of individual business decisions. "For example if an airline purchases a new aircraft".

Historically Icelandic economic growth is always slower in the first half of the year, than in the second half. Non-seasonally adjusted figures show a 4.3% growth in GDP during the first half of the year. 

The economy is slowing down
Icelandic economists all agree that the economy is showing clear signs of slowing down. A slower increase in the growth of tourism, due to the appreciation of the Icelandic currency, is a major factor. Construction is also expected to slow down as large projects which have been launched in recent years are completed.

Read more: Icelandic economy continues to boom: GDP expected to grow by by 6% in 2017

The most recent projection by Statistics Iceland envisions a 6% growth rate for 2017, which is significantly above the growth in neighbouring countries. 

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