Iceland: The Economic Canary in the Mine

As the US economy began to sour in mid to late 2008, Iceland had already been feeling the effects of a recessionIceland? and economic upheaval.  A few months before the Bear Stearns debacle, the feeling in Iceland was less than optimistic.  In fact, the economic collapse there was an early indicator of the trouble that lies ahead for America in 2008 and 2009.  Right now, Iceland has begun to thaw a bit, along with other high-income countries that have felt serious economic pain over the past year.  Unemployment has slowed and stabilized at around 8.5% and mortgage repayments were frozen in November of last year, leaving those in Iceland, who were once behind on their mortgage payments with a little more breathing room.  But all is not well on the island between Greenland and Mainland Europe.  Another serious economic shakeup is beginning to appear, which could have profound effects on its citizens, and could also be another alarm bell for the state of the US economy.

Much of the economic pinch that was felt in Iceland over the past year has been numbed by government stimulus programs.  This government spending, which was based on heavy borrowing, is set to be cut back by almost 40% by the end of 2009.  The wave of stimulus money will come crashing down first on those on the fringes of society, followed by anyone else who has a job or owns property on the island.  This massive cutback in spending will also be followed by the thawing of the mortgage freeze in November.  Those who have had the luxury of deferring payments for the past year will once again be expected to pay up, and this time, interest rates will not be on the side of the borrowers.  Even the IMF, which insisted on this freeze, along with many other banking countermeasures that were implemented last year, sees that Iceland may soon get out of hand again, as early as December 2009.  Their assessment of the coming economic crisis in Iceland loosely mirrors that of last years, which should be disconcerting for anyone hoping for and banking on a consistent global economic recovery.

All of these negative economic indicators for Iceland are beginning to paint a negative picture for the rest of the world as well, suggesting that we are currently experiencing the “eye of the storm” in this most recent global economic recession.  If the US and other countries had been paying close attention to Iceland they would have noticed that their own recession was preceded by Iceland’s by about a month and a half, and that Iceland is an excellent micro-economic example, or litmus test, for the rest of the world’s economic direction.  Perhaps it is now time to cash out of the major markets and begin to build back up the bunker of sustainability that helped so many weather the economic storm of 2008 and early 2009.  Trouble is brewing on the horizon in Iceland, but this time we know that this small island nation is the canary in the gold mine, and there still may be time to get out before a major economic collapse at home.