Iceland Mag

4 Reykjavik

Iceland Mag


More signs of full recovery from '08 crash: Private consumption reaching precrash peak

By Staff

Icelandic consumers are on track to exceed the pre-crash peak in private consumption by 1% next year, the latest analysis from Arion bank suggests. Private consumption crashed following the collapse of the Icelandic banking system in 2008, contracting by 6.7% in 2008 and 12.3% in 2009. Consumption has increased very slowly since, as homes have been paying down debts rather than increase their consumption.

Consumption has grown slower than disposable incomes
Since 2010 purchasing power has grown more rapidly than consumption, resulting in a higher savings rate. As a result household debts have been shrinking consistently. This year however private consumption will increase more than purchasing power, for the first time since the 2008 crash. 

A major reason for growing consumption is the strong Króna: The purchasing power of wages in foreign currency  (a measure of how much imported goods and services wage earners can buy) has never been higher, having more than doubled since 2009. The purchasing power is currently about 40% higher than the 2000-20016 average.

Read more: Icelandic economy continues to boom: GDP projected to grow by 4.9% this year

The latest economic forecast from Arion bank sees private consumption increasing by 8.2% this year, and 5.3% in 2018. Per capita consumption levels are still slightly below the pre-crash peak, but will exceed the 2007 level by 1% next year. Consumption will grow more slowly in 2019, reaching the long term average by 2020. 

Despite rising consumption and reduced savings rates Arion bank stresses that there are no signs of an unsustainable consumption boom. The report also cautions that figures on private consumption might be skewed by the recent boom in tourism, as it is unclear how much of the rising consumption is due to tourism.

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