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2003 OECD Economic Surveys: Iceland 2003

image of OECD Economic Surveys: Iceland 2003

This 2003 edition of OECD's periodic review of Iceland's economy examines recent economic developments, policies and prospects and includes special features on controlling public spending and structural policy developments.

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Economic Performance and Outlook

Strong growth since the mid-1990s was interrupted by economic overheating and an ensuing mild recession in 2002. From 1996 to 2001, Iceland experienced one of the highest growth rates among OECD countries (Figure 1). This dynamic performance reflected improved economic fundamentals following a shift of policies towards price stabilisation, fiscal consolidation and market liberalisation. The period of strong growth was spurred by brighter economic prospects associated with renewed interest in the development of power-intensive industries and a recovery in fish stocks. But, while the expansion was investment-led, it became increasingly driven by booming consumption. And, though the economy was in an excess supply position in 1995 following a prolonged adjustment period involving both fundamental macro- and microeconomic reforms, signs of overheating became increasingly visible in the late 1990s. The external deficit widened sharply, and a simultaneous capital outflow (facilitated by financial liberalisation) implied an extraordinary degree of financing by way of foreign credit, reaching one-fifth of GDP in 2000. The ensuing collapse in the exchange rate, combined with a stock market bubble, a surge in real estate prices and wage pressures owing to labour shortages, rekindled inflation.

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