The Icelandic economy and Game of Thrones: Just what the maester ordered
Iceland is known for its natural picturesque beauty, active volcanos, the northern lights and of course its friendly people. In fact, the country was recently named the friendliest country in the world by the World Economic Forum. However, the one black spot on the country’s nearly spotless record was the 2008 Icelandic banking crisis that left the country’s economy on the verge of complete collapse.
In 2008, all three of Iceland’s major privately owned commercial banks failed and the country’s stock market lost 80% of its value overnight. Brought on by the deregulation of banks in 2001, years of asset inflation and bad loans resulted in a national debt 10 times that of its GDP. The banks eventually defaulted resulting in the largest single banking collapse in world history.
With the economy teetering on the edge after the disaster, the government took emergency measures to get the economy back on its feet and stabilize the Icelandic krona. Nearly 10 years later Iceland has been called a European success story as its economy is now looking like a world beater. The country is on track to be the fastest growing economy among OECD member countries in 2017. And a lot of this is down to the recent boom in tourism and specifically, the hit HBO TV series, Game of Thrones.
Game of Thrones is, at the very least, partly responsible for the major uptick in tourism growth in recent years. Many of Iceland’s glaciers, lakes and national parks serve as the backdrop for the “lands beyond the wall” and the popularity of the show has given rise to massive increases in tourism, as the show’s many diehard fans from around the world make pilgrimages, so to speak, to visit the show’s popular filming locations.
Iceland received a record 1.8 million visitors in 2016, which was a 40% jump over the previous year, while 2015 saw a 30% annual increase. As a result, the booming tourism sector is widely regarded as the reason for the country’s recent surges in economic growth. In 2016, the economy grew a very impressive 7.2%, while the final quarter growth in 2016 came in at 11.9%. FocusEconomics is currently projecting Iceland's economy to grow 5.4% in 2017, which is slower than 2016, but is still nothing to sniff at.
However, with all the good news comes some bad news. Although the economy is poised to grow robustly this year largely on the back of the tourism sector, the Icelandic krona has appreciated massively as a result, prompting Bloomberg Markets to declare, “Game of Thrones crowns the Icelandic krona the world’s best currency.” But, a rapidly appreciating currency has the Icelandic Central Bank worried. The Sedlabanki has gone to great lengths to slow the krona’s gains amid concerns that the appreciation could see inflation targets missed and hurt exports. However, various rate cuts, the lifting of capital controls and foreign exchange purchases have done little to erode the appeal of the currency and curb the gains.
Indeed, fears over tourism have surfaced. The fishing industry’s output has lagged due largely to the strength of the krona, while tourism is affecting housing and rental prices, and the overall cost of living, as prices for staple goods rise due to significantly increased demand. Moreover, the IMF commented recently that although the economy is doing well, risks of overheating are a clear concern, while the Central Bank governor stated that the pace of economic growth has become slightly worrisome.
Tourism is projected to come in at 2.4 million visitors this year. That is about seven times the population of the tiny country and it has put a strain on public services and infrastructure. There have been reports of tourists needing to be saved from dangerous excursions as they visit remote parts of the country, and others needing to relieve themselves in the streets as public rest rooms are in short supply. The Icelandic healthcare system has also been put under pressure, as it cannot cope with the amount of people in the country.
Despite these issues, it would be hard to overstate the importance of tourism to the Icelandic economy and the role it played in pulling the economy out of the doldrums. Tourism was just what the maester ordered for the ailing economy when it needed it most. For those that are worried about an overheating economy and the strong krona, this should help to curb the tourism going forward by making it pricier for foreign visitors which should lead to lower prices by reducing demand.
From this point on, it’s important for Iceland to strike a balance. Most important, however, is that it does not appear that winter will be coming for the Icelandic economy any time soon.
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Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinion of FocusEconomics S.L.U. Views, forecasts or estimates are as of the date of the publication and are subject to change without notice. This report may provide addresses of, or contain hyperlinks to, other internet websites. FocusEconomics S.L.U. takes no responsibility for the contents of third party internet websites.
Date: September 19, 2017
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