1. Icelandic Economy Macroeconomic projections for 2006-2010 Copenhagen, 10 May 2006 Thorsteinn Thorgeirsson, Director-General, Ministry of Finance, Economic Department

2. Main findings • Economic growth was 5.5% in 2005 because of rapidly increasing national expenditure. • In addition to large scale investment projects an unexpected innovation in financial markets led to increased private consumption and imports. • In spite of a temporary disturbance in international financial markets the profile of the projections is mostly unchanged from recent projections. • This year the gross domestic product is expected to increase by 4.8% in real terms on the basis of a changing composition of growth. • The growth in national expenditure slows down along with imports while aluminum exports increase sharply. • In 2007 national expenditure is projected to contract in response to restrictive economic policy and the end of the present large scale investment projections. A sharp turnaround in trade leads to economic growth amounting to 1.8% that year.

3. Main findings • An unavoidable consequence of a combination of foreseen and unforeseen shocks is a temporary external and internal imbalance. • The current account deficit is projected to contract this year and to be halved next year. The recent depreciation of the exchange rate of the króna accelerates the external adjustment of the economy. • Unemployment has decreased and is expected to average 1.6% of the workforce this year but to increase to 2.2% in 2007 when activity slows down in the economy. • The estimated output gap for th economy has increased. New figures show GDP grew by 8.2% in 2004 (and not 6.2%). • The pressure in the economy is predicted to wind down due to the decline in the value of the króna and the completion of the current investment projects. • Inflation in 2005 rose by 4% on the back of a sharp rise in real estate prices. The decline in the króna expected to propel inflation to 5.9% in 2006. This development is temporary and in 2007 inflation is predicted to increase by 3.5%.

4. Main findings • In the projections for the years 2008-2010 the economy gravitates towards equilibrium and the annual average increase in GDP growth and inflation will be around 2.5% and the current account deficit approaches 2.0% of GDP towards the end of the period. • The Icelandic economy is now a part of the international economy with all its opportunities and challenges. The probability is considered limited that the progress achieved to date will stop or be reversed. • In international reports the Icelandic economy is considered one of the most competitive due to its human resources endowment, the technological standard and the structure of the economy. The firms, which enjoy flexible operating conditions, are profitable and able to adjust to changing circumstances. The fiscal position is also very strong and the assets of the economy are many times the debts. • The main risks to the projections are the exchange rate and further large scale investment projects.

5. The level and growth of GDP in constant prices 2000–2010 Sources: Statistics Iceland and own forecast.

6. Large scale investment projects 2003–2010 Source: Ministry of Finance.

7. Business fixed investment,volume change 1998–2007 Sources: Statistics Iceland and own forecast.

8. Exchange rate of the króna 1999–2007 Sources: Central Bank of Iceland and own forecast.

9. Growth of personal consumption and real disposable income per capita 1991–2007 Sources: Statistics Iceland and own forecast.

10. Current account balance 1997–2007 Sources: Central Bank of Iceland, Statistics Iceland and own forecast.

11. Alternative scenarios: Impact of the króna exchange rate on economic activity

13. Composition of economic growth 2002–2007 Sources: Statistics Iceland and own forecast.

15. Unemployment rate January 2004 – February 2006 Sources: Directorate of Labour and Ministry of Finance.

16. Output and labour market gaps and inflation 1997–2007 Sources: Statistics Iceland and own forecast.

17. Wage index, 12-month rate of changeDecember 2000 – February 2006 Source: Statistics Iceland.

18. Inflation 2003–2007 Sources: Statistics Iceland and own forecast.

19. Policy rate of the central bank and other interest rates January 2001 – April 2006 Source: Central Bank of Iceland.

20. Turnover in the real estate market in the Reykjavik metropolitan area1 June 2003 – February 2006 Source: Land Registry of Iceland.

21. Number of new dwellings 2000–2005 Source: Land Registry of Iceland.

22. Real estate prices in the Reykjavík metropolitan area January 2003 – February 2006 Source: Land Registry of Iceland.

23. Interest rate on 10-year government bonds in the euro-area, UK and USA 2003–2006 Source: EcoWin.

24. Revenue balance of the general government 1990–2007 Sources: Statistics Iceland and own forecast.

25. Cyclically adjusted net lending of central government 2000–2007 Sources: Statistics Iceland and Ministry of Finance.

26. Closing remarks • The temporary imbalance in the national economy is explained by on the one hand the large scale investment projects which were foreseen and on the other hand by important structural changes in the financial markets, which were unforseen. • Depsite considerable restrictiveness in economic policy the authorities have had their hands full to meet many shocks at once. • The Icelandic economy is open, operating conditions are good and the productivity growth is high. Firms and individuals adjust to changing conditions. • The imbalance is temporary. The structural changes are being absorbed and the economy has begun to gravitate to a state of equilibrium. • A temporary turbulence in international markets has reached Iceland. The outlook for the international economy is favourable despite problems. • The postion of the Treasury is strong in international context. The assets of the nation are triple the debts. • Slower economic growth is predicted in coming years with slightly more unemployment and less inflation. Limited probability of a hard landing.

27. Icelandic Economy Thank you