Despite brighter outlook for this year, the message remains the same: Falling exports will bring about economic contraction, followed by a gradual turnaround. We forecast a 0.9% economic contraction this year, primarily due to falling exports. In comparison, economic output was forecast to contract by 1.9% in March. Since then various economic indicators have developed more favorably than we originally anticipated. The most significant changes from the last economic forecast are smaller income decline in tourism than we feared, private sector wage agreements were more moderate than expected and the Central Bank’s revised payment card turnover figures suggest stronger private consumption growth than we anticipated. In addition, GDP growth in Q1 exceeded our expectations.
We forecast a positive current account balance throughout the forecast period. Falling imports in 2019 reflect slower domestic consumption growth. The current account balance supports the exchange rate of the króna, which is expected to fluctuate within a narrow range throughout the year, as the economic contraction has already been priced into the exchange rate. The exchange rate of the króna is assumed to appreciate in 2020, as the economy gets back on its feet. The inflation outlook has improved markedly since March, both due to a stronger króna and moderate wage agreements. Although inflation is forecast to stay above the Central Bank's inflation target, it remains well within the tolerance limit (2.5% +/- 1.5%), which opens up the possibility for further interest rate cuts.