Robust GDP growth in 9M/2016

GDP growth measured a hefty 6.2% in the first nine months of the year.  This is the strongest growth rate yet measured in the current upswing, according to figures published by Statistics Iceland (SI) this morning.  It is also the strongest growth rate measured in any EEA country during this period.  GDP growth actually measured 10.2% in Q3, but because quarterly figures are subject to wide fluctuations, it is more appropriate to consider longer periods of time.  This is why we look rather at nine-month figures. 

Output growth exceeds forecasts

GDP growth for the first nine months of 2016 is somewhat above most official forecasts for 2016 as a whole.  In our most recent forecast, published in September, we projected this year’s growth rate at 5.1%, and the Central Bank’s (CBI) most recent forecast, from mid-November, is for 5.0%. 

The SI figures therefore suggest that the output gap is widening somewhat more rapidly than the CBI assumed in its November forecast.  They also lend support to the opinion that the CBI’s Monetary Policy Committee (MPC) will decide to keep the bank’s key interest rate unchanged on 14 December, its next interest rate announcement date.   

Rapid growth in domestic demand

Domestic demand is growing apace at present, with SI figures giving a growth rate of 9.3% over the first nine months of the year.  Both private consumption and investment are buoyant at the moment. The growth rate according to SI numbers is only marginally above our forecast, however, as we had projected 8.8% growth for 2016 as a whole.  The CBI also anticipates robust growth, with a forecast of 8.7%.

Private consumption grew 6.7% in the first nine months,  supported by the improvement in households’ financial position, which in turn is shored up by a strong rise in real disposable income.  SI’s private consumption growth figures are somewhat below full-year forecasts, however, as we have projected 8.1% and the CBI 7.6%.  Furthermore, SI’s numbers are modest relative to what can be discerned from payment card turnover, imports, and other indicators of developments in private consumption.  

Investment growth outpaces expectations

Investment grew in real terms by 27.4% year-on-year during the first three quarters of 2016  and looks set to grow more rapidly than we had anticipated for the year as a whole. In our September forecast, we assumed a growth rate of 21.3% for this year,  and the CBI projected growth at 22.5% in its November forecast; therefore, both forecasts are likely to be overtaken.  Business investment is the main driver, with 34.2% growth during the period.  Residential investment measured 18.7% over the same period, and public investment was 3.1%.  In all instances, growth rates are somewhat stronger than we had forecast for the full year.  The ratio of investment to GDP was an acceptable 21.6% for the first nine months of 2016. 

Tourism the linchpin of the trade surplus

It is safe to say that the tourism boom has made its mark on SI’s external trade figures and is responsible for the lion’s share of the current upsurge in GDP growth.  Total exports grew by 10.0% in the first three quarters of the year, somewhat above our forecast for 2016 as a whole. Of that total, services exports grew by 17.0% and goods exports by a mere 3.3%.  Import growth measured 16.6% over the same period.  There was more consistency between imports of goods and services than between exports of goods and services,  as goods imports grew 14.7% and services imports by 20.3%.

The contribution of net trade to GDP growth was more positive over the first three quarters than forecasts had indicated, and it looks as though the same will apply for 2016 as a whole, thanks to the astounding growth of the tourism industry.