Islandiatiko albisteak (2)

Sarrera, ikus Islandiatiko albisteak

Segida:

(iii) Islandiako sektore balantzeak eta turismoa

Iceland’s sectoral balances and growth of tourism¹

Iceland’s economy has had a stellar economic run since the crash in 2008. The main driver, in case you haven’t realised, is tourism. And contrary to the situation back in the pre-2008 years, Iceland’s sectoral balances are not driven any more by the private sector’s debt appetite, but ca. 2,000,000 tourists per annum.

The graph below is Iceland’s sectoral balances. As far as I know, not a single developed economy has ever managed to run itself with a private sector deficit of 30% of GDP as was the case in 2006 in Iceland. Only a slight knowledge of sectoral balance analysis and other MMT principles is enough to understand that such a situation is not going to be sustainable, not even for the short run. But, of course, me and other Icelandic economists didn’t have the slightest idea what sectoral balances were back then!

The same graph also shows that contrary to the pre-2008 situation, Iceland was running a current account deficit equivalent of ca. 25% of GDP.

Today, this has turned around. And the driver for the real exchange rate is not capital flows anymore but exports, i.e. tourism. The real exchange rate has consequently shot up, despite (weak) efforts from the central bank (full disclosure: I am an alternate member of the Central Bank’s Supervisory Board but speak entirely for myself here!) to meet the strengthening by buying FX and building up FX reserves.

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Thanks to this, households and companies are in much better shape now than they were in the past to take on any economic shocks, endogenous or exogenous (and, of course, the endogenous shocks are not going to be as severe when debts are being paid pack).

Iceland’s economy is a fine example of how MMT analysis can help in understanding economic development and situations. Back in 2005 or 2006, had Icelandic economists understood MMT principles (we didn’t and most still don’t: I’m one of few Icelandic post-Keynesians) we would have raised red flags and rung all alarm bells that we possibly could have found! And today, we can confidently say that when the contraction in the growth of tourism (2nd derivative, mind you!) really kicks in (notice the peaking of growth of foreign cards’ turnover) because of the now-too-strong ISK (we’re already seeing foreign travelling agencies cancelling bookings for summer 2018) the Icelandic economy will most likely float through it rather easily. 

What does worry me is that the central bank doesn’t understand that it cannot go bankrupt in ISK (it issues it!), which was one of the reasons why it was shy in meeting the exchange rate strengthening from 2014 onwards with FX purchases. 

Consequently, the krona got too strong and when it will inevitably fall in value (last but not least because FX controls have been eased) the exchange-rate passthrough effect will increase the general price level, a problem that could have been averted had the central bank bought much more FX and at least slowed down the real exchange rate strengthening. Thankfully, other supply-side shocks, such as oil price, don’t look like they will deliver any huge cost increases at the same time.

Gehigarriak:

(a) Islandia: sektore balantzeak

(b) Islandiak DTM behar du