Icelandic economy faces contraction but avoids recession declaration

The Icelandic economy is facing a noticeable contraction, but it may not necessarily be in a state of crisis. New preliminary data from Statistics Iceland indicates that the country’s GDP has shrunk for two consecutive quarters. According to established economic guidelines, this condition typically suggests the economy is in recession. However, a professor of economics at the University of Iceland cautions against such a definitive conclusion.

Gylfi Magnússon stated that despite the measured contraction, he is hesitant to declare that Iceland is experiencing a recession. The latest figures reveal a 0.3% decline in GDP for the second quarter, following a decrease in the first quarter. This revision includes an updated estimation, reducing an initial projected decline of 4.1% to 3.5%.

Gylfi explains that while a common economic rule states that two consecutive quarterly declines indicate recession or significant cooling, it should not be taken too literally, especially with preliminary figures. He noted that the fluctuations are relatively small, and further observation is needed to draw robust conclusions about the economy’s trajectory.

He also mentioned that the concept of stagflation, where inflation and stagnation occur simultaneously, may not apply in evaluating the current economic situation. Iceland has been battling considerable inflation, and the central bank is implementing measures to address it, which are progressing gradually. Nonetheless, the current data suggest that the economy is indeed cooling, potentially aiding the central bank’s efforts to control inflation.