This morning, Statistics Iceland (Statice) published a new economic forecast, its first forecast since WOW air’s bankruptcy. We had eagerly awaited the publication, as our Economic Outlook has been the only official macroeconomic forecast to date that includes WOW air’s bankruptcy. Statice GDP forecast assumes a much smaller economic contraction this year than our forecast, in addition to stronger turnaround in the coming years. Hopefully that will be the case, but we must admit we are doubtful. In our opinion, Statice is too optimistic when it comes to the impact of WOW air’s bankruptcy on exports, unemployment and private consumption. Statice must of course be prudent when publishing forecasts, as government budget is largely based on them. In recent years, this has resulted in forecasts being too pessimistic but, this time around, we are concerned that it will be quite the opposite.
Following is a brief comparison of Statice forecast and Arion Research’s Economic Outlook.
GDP: Statice forecasts a slight economic contraction this year, or 0.2%, compared to Arion Research’s more pessimistic forecast of 1.9% contraction. Furthermore, Statice expects the economy to quickly bounce back, climbing to 2.6% GDP growth as soon as 2020. The main differences between these forecasts is the development of external trade and private consumption.
Sources: Statistics Iceland, Arion Research
Exports: Statice forecasts a 2.5% contraction in exports this year due to a decline in tourism and supply shock in marine exports. It’s noteworthy in our opinion that the decline is not greater given the fact that the two largest export sectors are hard-pressed. Statice doesn’t publish a breakdown of exports, which means we have to try to fill in the blanks. First off, according Statice report, a considerable contraction in marine exports is forecasted as capelin quotas were not released for this year. Last year alone export value of capelin amounted to 18 bn. ISK, or 0.6% of GDP.
What about tourism? If we take out the export value of capelin and use Isavia’s tourist arrival forecast, which assumes a 2.4% decrease, back-of-the-envelope calculations result in an export forecast that is very similar to Statice forecast. So is Statice basing its economic forecast on an outdated tourist arrival forecast, a forecast that nota bene is built around two operating Icelandic airlines? Or is it expecting other airlines to pick up the slack, despite Icelandair having a hard time growing due to grounding of nine Boeing MAX 737´s? Regardless, both of the assumptions are questionable in our opinion. Hence, it is our view that Statice is too optimistic when it comes to exports.
Sources: Statistics Iceland, Arion Research
Private consumption: Statice expects decent private consumption growth this year, or 2.4%. The report states that “It is possible that the first few months have been characterized by precautionary savings due to uncertainty surrounding collective wage negotiations in the labor market.“ We expect unemployment to climb higher this year than Statice, to 4.4% compared to 3.7%. It appears that rising unemployment plays a greater role in our private consumption forecast. Admittedly, it must be said that the risk in our forecast is upwards. We might be underestimating private consumption growth, for example because our forecast was based on incorrect payment card turnover figures. After the CBI corrected the numbers, payment card turnover growth proved to be more resilient than previous numbers had indicated. However, a 2.4% private consumption growth is pretty hefty.
Sources: Statistics Iceland, Arion Research
Investment: There is quite some difference between the investment forecasts, mainly due to different outlooks on business investment. While Statice expects business investment to contract by 10% this year our forecast only assumes a 4% contraction. Statice expects a slight contraction in regular business investment and investment in heavy industry, while we expect a slight growth. The forecasts appears to be in unison when it comes to ships and aircrafts, a considerable contraction is foreseen.
Housing investment is similar between forecasters, but there is a difference in public investment forecasts, as various government investments have recently been delayed.
Sources: Statistics Iceland, Arion Research
Inflation: There is some difference between the inflation forecasts. Our forecast was published before the signing of collective wage agreements. As the agreements proved to be more prudent than we had dared to hope for, our wage forecast is closer to the ceiling, something that affects the inflation forecast. Our inflation forecast for 2020 is therefore probably too steep, although we feel that Statice is too optimistic. Inflation might lie somewhere between the two forecasts in coming months. However, it should be noted that Statice expects the króna to remain unchanged throughout the forecast horizon, while we expect the króna to depreciate slightly over time.
Sources: Statistics Iceland, Arion Research