Country Report Iceland July 1998 Main report

Summary--Iceland 3rd quarter 1998.

Outlook for 1998-99: The government is almost certain to be re- elected when it goes to the polls, no later than April 1999. The coalition remains popular, and even if the opposition puts forward a united front it is unlikely to make up sufficient ground to unseat the incumbents. The economy will continue growing rapidly, by 4.4% in 1998 and 3.9% in 1999. Strong private consumption growth and an investment boom will be offset by a weakening external sector. Overheating will manifest itself in accelerating wage inflation and a boom in both consumer and capital imports, although price inflation will remain subdued.

Review: The country's largest party, the Independence Party (IP), which is currently the senior coalition partner, and the Progressive Party (PP), the junior government party, managed to maintain their share of the vote in recent municipal elections. The four main opposition parties joined together in a loose alliance but failed to make the inroads they had anticipated. Despite this a key figure in the Reykjavik municipality, Ingibjorg Solrun Gisladottir, has emerged as a potential leader of the opposition at national level. The government has come under pressure over allegations of financial improprieties on the part of a senior minister, and faced difficulties over a major strike by the country's nurses which resulted in a wage settlement above centralised pay bargaining guidelines. The economy has continued to grow strongly with few signs of inflation. However, wages have risen rapidly, threatening competitiveness, and early first-quarter merchandise trade and current-account data show adverse movements in both accounts. Fish quotas, both internationally and domestically, have been increased. A German-Canadian partnership plans to develop and test non-polluting fuels for use in land and sea transport, while a US firm has brought its 60,000-tonne capacity aluminium smelting plant on line in record time.

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