2008 OECD Economic Surveys: Iceland 2008

image of OECD Economic Surveys: Iceland 2008

OECD's periodic survey of the Icelandic economy. This edition examines the major economic challenges faced by Iceland in 2008, in particular a more effective monetary policy, strengthening the fiscal framework, and improving cost-effectiveness in the health care sector.

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Assessment and recommendations

The Icelandic economy is prosperous and flexible. With its per-capita income growing at double the OECD rate since the mid-1990s, it is now the fifth-highest among member countries and more than a quarter above the OECD average. This impressive performance is attributable to extensive structural reforms that deregulated and opened up the economy, thereby unleashing entrepreneurial dynamism, as evidenced by an aggressive expansion of Icelandic companies abroad. Improved growth performance has been accompanied, however, by mounting tensions and imbalances in the economy. With financial-market liberalisation facilitating access to credit, and reducing its cost, aggregate demand has increasingly outstripped potential output, despite a substantial inflow of foreign workers. As a result, inflation and the external deficit have soared. Foreign indebtedness is the highest among OECD countries. This has made the economy vulnerable to changes in foreign investor sentiment, especially in the context of fragile global financial-market conditions.

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