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Report: Icelandic economic growth tops all but one OECD country in 2016: GDP grew 7.2%

By Staff

  • Tourism a major boost The Icelandic economy grew four times as fast as the OECD average in 2016. Photo/Iceland Mag-OECD figures

The Icelandic economy grew by an astonishing 7.2% in 2016, according to preliminary annual national accounts for 2016, prepared by Statistics Iceland. Only one OECD country had higher GDP growth in 2016. The Indian economy grew by 7.5%. The growth in Iceland was more than four times greater than the OECD average, which was 1.7%.

Read more: Growth in tourism contributes four fifths of GDP growth in 2016, half of growth in 2017-19

The growth exceeded projections. Statistics Iceland had projected that the GDP of Iceland would grow by 4.8% in 2016. The Icelandic economy has now made up the losses of the financial crash, as the GDP is now 10% greater than it was in 2008.

A record year
GDP increased by 7.2% in real terms, while household consumption increased by 6.9% and fixed capital formation increased by 22.7%. Economic growth in Iceland has not been this strong since 2007, at the peak of the pre-crash financial bubble. GDP growth in 2007 was 9.3%. Private consumption has never before increased as much, again with the exception of 2007.

Export of goods increased by 11.1% in real terms, while import of goods increased by 14.7% in 2016. Iceland had a positive balance of trade thanks to a large surplus of service exports. Service exports amounted to 26.8% of GDP and outweighed the exports of goods for the first time in the history of Icelandic National Accounts dating back to 1945. 

Read more: Iceland had a positive balance of trade in 2016, thanks to tourism

Powerful increase in private sector investment
Investment in 2016 grew more in 2016 than it has done since 2006. Virtually all the increase in investment came from the private sector and residential construction. Business investment grew by 24.7% and residential construction increased by 33.7%. Investment in public works amounted to 2.5%.

Government consumption shrank in 2016 compared to previous years. In 2016 government final consumption amounted to 23.1% of GDP, compared to an average 24.3% in 2010-2015.

Strong fundamentals but signs of overheating
Economists who spoke with the local newspaper Fréttablaðið said last year's growth was straining the capacity of the economy. The labour market is unable to keep up with the growth, and infrastructure is being stretched to its betaking point. 

Read more: Up to 4,000 foreign workers needed annually for the foreseeable future

There is no reason to expect a 2008-like burst, as economic growth now is based on strong real demand and exports, rather than being fueled by private borrowing, financial leverage and speculation like the pre-crash boom. There is no sign of tourism slowing down this year, and economists argue private consumption has not peaked. This could ensure growth in 2017 will come close to last year's growth.

Gylfi Zoega, professor of economics at the University of Iceland, told the Icelandic National Broadcasting Service that the driving force of the economic growth was tourism which had led to a large positive balance of payments and strengthened the Icelandic currency, the Króna, which increased purchasing power. External conditions were also particularly favorable for Iceland. 

GDP growth 2016

GDP growth 2016 Growth in Iceland topped China. Only India experienced faster growth in 2016. Photo/Iceland magazine/OECD

 

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