Icelandic Economy: Spring Forecast 2008 - Hard Landing Imminent?

1. The Icelandic economy– spring forecast 2008 National economic forecast for 2008-2013 Is a hard landing imminent? Thorsteinn Thorgeirsson, Director-General, Economic Department 21 May 2008

2. Main conclusions • Despite growing turbulence in financial markets in 2007, GDP growth amounted to 3.8 per cent for that year. Investment, private consumption as well as exports exceeded expectations. • For this year, GDP growth is forecast at 0.5 per cent, mainly based on a sharp increase in aluminium exports and a decline in imports. • GDP is forecast to contract 0.7 per cent in 2009, in part because of an expected decline in private consumption and housing investment. Business investment is forecast to continue to decline despite the construction of another aluminium plant. • For 2010, GDP is forecast to increase by 0.8 per cent as private consumption revives as well as business investment.

3. Main conclusions, cont’d • The external balance is improving rapidly. After peaking at 26% of GDP in 2006, the current account deficit reached 15.5 per cent in 2007. In 2008, it is expected to decline to 13.2 per cent, before reaching 7,7% in 2009 and 6.6 per cent of GDP in 2010. • Unemployment is forecast to increase to 1.9 per cent of the labour force this year and to 3.8% in 2009, but to decline to 3.5 per cent in 2010. • Inflation is expected to average 8.3 per cent this year and to decline to 3.9 per cent in 2009 and to 2.5 per cent in 2010.

4. Main conclusions, cont’d • There are numerous plans for further energy-intensive investments including related power project construction. Should these plans be carried out, annual GDP growth would be up to 1.5 per cent higher in the years 2009-2011. • The increase in activity would be accommodated by slack projected to develop in the economy in coming years. • Main elements of uncertainty are i) the exchange rate, ii) conditions in international financial markets, iii) further large scale investment projects and iv) civil servant wage agreements later this year.

5. GDP, domestic demand & current account, 1995-2010In per cent of GDP

6. Output gap, labour market gap & inflation1998–2010

7. Real estate market in metropolitan area 2005 - 2008

8. Growth in private consumption per capita, real estate prices and stock market prices

9. New auto registrations

10. Private consumption & real disposable income, 1995-2010

11. IMF alternative scenarios USA Euro-zone World, other

12. Further large scale investments 2008-2015

13. Alternative scenario: further large scale investments

14. Current account 2000-2010

15. Unemployment rate & wage index 2001-2010

16. Exchange rate & currency market turnover 1999-2008

17. Exchange rate & inflation 2000-2010

18. Interest rate development 2001-2008

19. Bank lending to domestic & foreign parties 2003-2008

20. Public investment 1998-2010

21. Central government revenue balance 1998-2010

22. Risk premia in European money marketspread between 3 mo. EURIBOR & EONIA swap index

23. CDS spreads for the Icelandic banks

24. The Icelandic Economy Is a hard landing imminent? • The profile of the projections suggests a downturn similar to that seen in 2001-2002. • The economy is expected to enter a moderate recession in 2009 but a recovery in 2010. • A hard landing is therefore not expected. • Areas of uncertainty include conditions in international financial markets, the exchange rate and further large-scale investment projects. • The strong position of the Treasury and the pension fund system along with flexibility and resilience of the economy make it better able to handle present conditions and restore balance.

25. The Icelandic Economy Is a hard landing imminent? Mange tak!