https://www.ft.com/content/f1a63fc2-3054-32d2-a18c-dea9af7258bd

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https://www.ft.com/content/f1a63fc2-3054-32d2-a18c-dea9af7258bd

It’s not often that a shrinking economy counts as good news, but confirmation that Iceland had dropped into its first recession since 2012 helped the country’s krona break a five-day losing streak on Friday, as the country’s central bank insisted the headline figures don’t accurately reflect the state of the economy. Seasonally-adjusted figures released earlier today showed that gross domestic product dropped 1.1 per cent in the three months to June, marking the second successive quarter of declines – the technical definition of a recession. However, a first-quarter decline of 0.9 per cent was not as bad as previously thought, revised from earlier estimates of a 1.9 per cent decline. Consumer spending, capital investment and exports all improved, but a surge in imports dragged down overall GDP. Iceland’s small economy and volatile exchange rate makes it prone to big swings in economic growth, and Capital Economics’ Stephen Brown suggested the outlook for the country is still strong: A strong labour market and subdued inflation has helped to keep consumer confidence high, which bodes well for GDP growth. Moreover, the krona has weakened in recent months, which will provide some relief for exporters. A series of interest rate cuts have encouraged the krona to weaken after a years-long rally, but it strengthened around a quarter of a percentage point against the euro on Friday, despite the euro making gains elsewhere. The nordic island only fully rejoined global financial markets this March, after the collapse of its banking sector forced it to implement capital controls to stabilise the krona. The move reflected the strength of the country’s recovery, and economists at the central bank today stressed that the economy remains healthy despite technically being in recession. They highlighted the shortcomings of the quarterly GDP figures, noting: These are notoriously difficult to interpret and you frequently see negative quarterly numbers in years of robust growth. Year on year growth measured 3.4% in Q2 and 4.3% in H1. Clearly a sharp slowdown from 2016, but a significant part of that reflects temporary factors – such as the impact of the fishermen strike in Q1 on exports and inventories – and volatile items such as the sharp slowdown in investment in ships and airplanes. The overall story therefore suggests an economy gradually slowing down from the break-neck speed of 2016 – which is welcome rather than a source of worries. Iceland is not the only smaller economy to be exasperated by its own growth figures in recent years. Ireland’s statistics office has been forced to develop its own alternative measures of economic growth as the economy’s popularity with international investors caused distortions such as an annual growth rate of 26.3 per cent in 2015.

https://www.ft.com/content/f1a63fc2-3054-32d2-a18c-dea9af7258bd