Unemployment in Iceland

Unemployment in Iceland stands at 7.2% as reported by mbl.is. I wrote about the challenges related to company bankruptcies. What is troubling in these numbers is that age groups between 16-24, it peaked at 16.2% in 2010 and it is still at a very high and stubborn 14.6%.
Why is the unemployment level in Iceland still so high inspite of the GDP growth that has been touted by the Central Bank of Iceland, the Icelandic Government and the IMF? I have been asking the same question, if everything is fine and dandy, why are there not more jobs being created? What is another troubling trend is the number of people who have been unemployed for more than 6 months. That number is persistent and quite high 26% in 2011. I think the overall number is important but what is more important are the above numbers the unemployment of young people which tells me the labor market is does not employ people with limited skills and those who have not been employed are not able to find work. How should we be creating jobs? You know where I am going with this if you have been reading this blog... Entrepreneurs of course! I also believe there is a mis allocation of capital in the economy, a lot of the capital is NOT being allocated i.e it is sitting in banks. The capital that has been freed is being allocated to speculate on Real Estate, which is evident in the prices of housing in Iceland. I wrote about it yesterday, here are the numbers and graphs to support the argument... notice the clear upward trend.

If one takes only the month of January and see the trend it is quite evident that there is a huge capital push into the Housing sector. This is not a healthy trend. I think there is significant relationship between the unemployment level and what is happening in the price levels of housing. Capital is being deployed in speculating on Real Estate but not on productive entreprises that need capital. We have seen this movie before and we know how it ends and I am not the only one saying this.

Is a bubble forming in Iceland?

This is from the publication of Statistics Iceland on Household Expenditure Survey 2008-2011 -

"Average household expenditure is 442 thousand ISK a month or 183 thousand per individual, i.e. 3.1% lower than in the previous survey per household. The expenditure per individual declined by 4.6%. The CPI rose by 5.4% between 2009 and 2010, hence the real household expenditure declined by 8.0%. This is equivalent to 9.5% decrease per individual in real terms. Disposable income rose by 3.6% per household and by 2.0% per individual."

The graph above shows the changes between years in CPI from 1988. What is interesting to note is that CPI has been going up irrespective of Capital Controls since 2008 and a hawkish stance from the Central Bank of Iceland. What this tells me is that the policy tools in Iceland employed by the Central Bank of Iceland does not work. How does one fix this problem? I have written about one solution. Inflation is a bad thing, one simple reason why this is the case is because it is like a cancer that eats into the asset values in an economy that is why every Central Bank takes an Hawkish stance to control the supply of money or not, like Zimbabwe or Greece before they joined the EU. Central Banks have the authority to print money but there needs to be something worthwhile against those printed currency if the economy does not produce valuable goods and services then it only leads to too much money chasing too few goods and services and result in Inflation. The trend is Iceland is giving me a heart burn. There have been no new industry or goods and services created, overall household consumption is going down, the government consumption is going up and change in CPI between years is upward trending, in addition to this the Real Estate market prices are being driven up by all the pent up currency before the collapse. All this can lead to only one thing rising prices of assets and which ultimately leads to a bubble and we all know what happens to bubbles.

Related articles

• Some companies in Iceland benefited from 83 percent debt write off (icenews.is)
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• Fairy (icelandeyes.blogspot.com)
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Is Icelandic economy really growing?

I have been hearing a lot about how the Icelandic economy is showing signs of GDP growth and the new projections of the Central Bank of Iceland and the Government of Iceland are based on that growth projection. I have written about what I think about projections and forecasts... bottom line I DONT BUY IT. Lets look at the number of new companies registered in Iceland vs the number of companies filing for insolvency. If you look at the trend since 2008, the number of insolvencies have been rising dramatically and the number of new companies being formed has been dropping dramatically this is a double whammy. I wonder where is this growth that everyone is talking about is coming from? It could be the existing companies are growing but where? the fishing industry cannot grow because of the quotas, the energy industry cannot grow because there have been no capital investment in any manufacturing industry, tourism is probably the only industry that is growing. I am not sure what is the path forward? which sectors should Iceland focus on growing? I think I know where resources should be devoted, but then again is that where the resources are being devoted? I don't think it is quite clear looking at the data. I am almost certain that all the new startup companies that have started in the last couple of years are going to suffocate without new investment and capital.
If you are interested in the data you can find it here, the source of the data is Statistics Iceland it is an excellent resource if you have not used it already.

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