Photographer: Arnaldur Halldorsson/Bloomberg

Iceland's GDP Soars 10%, so Residents Are Preparing for the Next Crash

  • Wages, housing prices rising by double-digits amid boom
  • Icelanders say economy much more diversified to handle shocks

Iceland’s history is of booms and busts.

So as the inhabitants of a volcanic rock in the middle of the North Atlantic ocean roar back from their 2008 economic meltdown (this latest boom was fed by tourism and construction), the talk in the streets is of what shape the next crisis will take and when exactly it will hit.

“We’re just going through the up-cycle at the moment,” Einar Jonsson, a retired driver, said in an interview while grocery shopping in Reykjavik. “For the next few months -– might even be a year or two -– Icelanders will step all over each other to make as much money as they possibly can in an effort to live through the next collapse.”

Don’t just take the man in the street’s word for it. Titans of industry, local economists and even the European Union and the International Monetary Fund are all warning that Iceland’s economy risks overheating. 

Read more on Iceland’s economy here

The latest reading showed the $21 billion economy expanding at annual pace of 10.2 percent. Wage growth is in the double digits, home prices rose 11 percent last year, the trade deficit is swelling and unemployment has plunged below 3 percent. Meanwhile, the central bank is under pressure to cut interest rates to prevent the currency from appreciating.

Iceland may be able to avoid a so-called hard landing like the one it suffered at the end of 2008, but “history teaches us that we’re not particularly good in managing situations like these,” Gylfi Magnusson, an economics professor at the University of Iceland and a former economy minister, said in an interview. “I hope we’ve learned something and that we’ll manage this better now than often before. But that remains to be seen.”

To be sure, Iceland has taken several steps to handle the next economic downturn, including stricter oversight of its banks, which were the prime culprits behind its 2008 collapse. The government has restricted foreign currency loans and is now running a budget surplus. There’s a current account surplus and the central bank has built up a massive foreign currency reserve. Parliament has also taken steps such as requiring the Finance Ministry to introduce annual five-year plans for public finances.

Arni Oddur Thordarson, chief executive officer of Marel, which sells food processing equipment and is Iceland’s biggest listed company, says the economy is now much more diversified and therefore better able to withstand another shock.

He also notes that Iceland has gone from being one of western Europe’s poorest economies in the 1980s, based on per capita income, to now being among the richest, though the ride can at times be “bumpy.”

“When you look at the width of the Icelandic economy, it’s never been as great as it is now,” said Thordarson, 47. “Now it’s just a question of a balancing act -– the economy is much more balanced than ever before.”

But the economic success has not been shared by all. That was evident in last year’s election when the Pirate Party nearly surged into power amid a groundswell of anti-establishment dissatisfaction.

Read more on Iceland’s election

For Gudrun Gunnarsdottir, a kindergarten teacher in Reykjavik, the new economic framework leaves much to be desired. She lost her apartment in the 2008 economic collapse when she was unable to keep up with payments on her foreign currency loan as the krona plunged.

Now, she doesn’t earn enough to qualify for a mortgage but is paying more in rent than she used to on her home loan.

“I’m fine to pay 40,000 kronur more each month to pay off my rent,” she said. “I’m glad I’m not a math teacher here, because in Iceland 2+2 doesn’t always equal 4.”

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