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Photo: Golli. Central Bank Governor Ásgeir Jónsson.

Historical GDP Drop in Iceland Still Less than Predicted

Iceland’s Gross Domestic Product decreased by 9.3% in the second quarter of 2020 compared to the same period in 2019, according to estimates from Statistics Iceland. It is the largest fall in quarterly GDP since Statistics Iceland began measuring economic growth on a quarterly basis. The drop, however, was less drastic than predicted, and Iceland has experienced less of a downturn than most of mainland Europe. The winter ahead is expected to be difficult.

The COVID-19 pandemic and measures taken to counter its spread had a clear economic impact in Iceland in the second quarter of this year. Employment declined by 11.3% compared with the same quarter in 2019. Domestic demand dropped by 7.1% and household expenditure by 8.3%, while government expenditure rose by 3%. Travel restrictions had a significant effect on both imports and exports of services during the period. Exports decreased by 38.8% while imports decreased by 34.8% compared to the same period last year.

Better than Expected

Iceland’s GDP has decreased for two quarters in a row, generally indicative of a recession. Though the newly-released figures are hardly encouraging, Gylfi Zoega, Professor of Economics at the University of Iceland, says they are better than expected. “The Central Bank expected an 11% contraction in the second quarter, but it has now come to light that it is 9.3%. So what this new news is saying is that this is a slightly smaller contraction and that the situation is a little better, not much better, but a little better than expected,” Gylfi told RÚV. One factor that has softened COVID-19’s economic impact in Iceland is that locals have been spending more domestically. Government measures to stimulate the economy and the Central Bank’s lowering of interest rates have also had a positive impact, Gylfi stated.

Iceland’s 9.3% contract is also smaller than that of many countries in mainland Europe, as the numbers in Statistics Iceland’s report show. The European Union as a whole experienced a contraction of 11.7% in GDP, while the decrease was 20.4% in the United Kingdom, 18.5% in Spain, and 13.8% in France.

economic recession europe stats iceland
Statistics Iceland.

Challenging Winter Ahead

In a televised interview yesterday, Governor of Iceland’s Central Bank Ásgeir Jónsson outlined some of the reasons Iceland had come out of the second quarter relatively well. “First of all, we are an island and we actually managed to get control of the virus relatively early. Then there is a lot of so-called ‘monetary leeway’ in Iceland. Interest rates were so high when this shock started, so we were able to lower interest rates significantly and get relatively strong stimulus through monetary policy and stimulate private consumption and more.”

A recent poll found 38% of employers expected to resort to layoffs in the coming months, while only 6% planned to hire staff. Ásgeir stated that the coming winter could indeed prove difficult. “There will be problems ahead but I believe we can solve them,” he stated in a television interview yesterday. “We still have some cards up our sleeves and we will respond to this recession and try our best to ensure that it affects the nation as little as possible.”

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