Arion Bank's new economic forecast assumes a 7.5% contraction in 2020. The economic outlook for this winter has deteriorated over the last few weeks and the contraction seems set to extend into the first quarter of next year. The economic recovery will therefore begin slowly but gather momentum in 2022 and 2023, driven by private consumption and exports. This economic forecast assumes that the impact of COVID-19 on the global economy will start to diminish significantly in the second half of next year. If this happens sooner or later than assumed, the forecast will shift accordingly.
The bleaker economic outlook for the coming winter is reflected in the unemployment rate, which is expected to continue to climb and average 8.3% next year. Nevertheless, it appears that private consumption will drop less than previously thought, as most people who keep their jobs are set to receive a real wage increase. Continued housing price increases and low interest rates also serve to buoy private consumption. Due to rising housing prices and a weaker ISK, inflation is expected to stay above the Central Bank’s 2.5% inflation target for the next year. However, inflation is quick to subside if, and when, the ISK appreciates.
Business investment is expected to contract sharply this year despite historically low interest rates. Financing costs have risen despite the cut in key interest rates and the promise of quantitative easing. This could slow down the investment recovery. It’s vital to nurture investment, especially business investment, which provides the foundation for future value creation thus ensuring a more diverse sources of revenue, both for the economy and the public sector.