Notes from the depression: an update

I know a lot of readers are curious to know exactly what our current situation here in Iceland is and what the economic crisis actually means in practice. I’ve been slightly at a loss as when it comes to writing about it because the implications are felt on so many different levels and it would be impossible for me to do justice to them all. Mindful of that, here is a somewhat incomplete status update.

As many of you will have seen from the headlines in the sidebar, there were massive layoffs here at the end of last month. Most of those were in the construction industry – manual workers, designers, architects … anyone in the business of constructing new buildings. Many were foreign citizens who had been living and working here temporarily in construction. The second-largest hard-hit industry was, obviously, the financial services sector – bank workers being laid off. The third-largest was retail. In addition, many people have been laid off and then re-hired on different terms, which usually has meant that they’ve had to take a pay cut.

Basically, things here have slowed down drastically. Public and private spending has been cut back wherever possible. Pretty much anything that can be postponed, has been postponed. That goes for companies and institutions [public and private], as well as individuals. People aren’t going out to buy new cars or even new clothes these days, nobody is remodelling their house or doing anything of the sort that isn’t absolutely crucial. A state of affairs that I suspect isn’t unique to Iceland – this is what happens across the board in a recession.

What IS unique to Iceland – and very troubling – is the state of our currency. As retailers are having to replenish their imported supplies and the krona has plummeted in value, everything is going up. That includes food. Foreign currency reserves are low [that IMF loan still hasn't come through] and it is being rationed … retailers have some sort of priority, the conditions of which I am not too familiar, but I suspect food retailers are high on the list. Consequently we aren’t seeing any food shortages, supermarket shelves are all well stocked – but everything just costs a lot more. Fruit and veggies, for example, have gone up by around 60 percent from a couple of months ago. Prices for domestic produce and products have risen less.

Case in point: yesterday it was announced that IKEA would be raising its prices by 25 percent today, despite having a price guarantee in its catalogue from August that prices would remain the same for the entire year [and in the August catalogue they had already risen a fair bit from the previous year]. Apparently this is the first time in the history of the company that this is done. The manager of IKEA Iceland was interviewed on RÚV and explained that in one year the krona had depreciated by 90 percent against the euro, which is their trading currency, so it was either raise prices dramatically, or close the company. They’d ordered goods for ISK 400 million in September, but as foreign currency had been rationed they had not been able to pay their invoice until weeks later – by which time it amounted to ISK 560 million due to the devaluation.

The Central Bank is forecasting over 20 percent inflation by early next year and I think most of us here know that this will be the time when we really start to feel the full effects of the crisis. As yet, those people who have been laid off are still earning salaries [there is a three-month severance period here in Iceland, between dismissal and actually leaving the job, so employers are obligated to pay salaries for that time] but in a couple months time they won’t be and that’s when things will start to get really bleak.

As for elections, they are not scheduled until 2011 and at this moment there is no sign of an early election. As far as I know, the only way to force an election is for the President to intervene, and if the government is steady and with a strong majority he is not likely to do so [although prolonged and massive protests would likely put the pressure on]. Personally I don’t think dissolving the government and calling an election would be wise at this time. It would only create further instability. That said, I do NOT want to wait another three years for an election – I think they should be called in another 6-9 months, when most of the fires currently raging in our society have been extinguished and the different political parties can get new manifestoes together [we're already seeing radical changes to the policies of the different parties, particularly with regard to the EU].

The management of the Central Bank is another matter entirely – in my opinion the three governors should have been dismissed immediately at the start of the crisis and replaced with ONE skilled economist who knew what he was doing. I find it infuriating that this hasn’t been done but sadly, I am not surprised, because that is how things tend to run here in Iceland. The Prime Minister, who someone the other day called “Davíð Oddsson’s press officer” because he persists in defending him, has announced that he trusts the governors of the CB implicitly and that he has no intention of making any changes. Meaning his old buddy and Independence Party comrade Doddsson will enjoy his cushy seat at the CB for the foreseeable future, despite the fact that the other party in the government coalition – the Social Democratic Allicance – have publicly denounced him.

So there you have it. I’m going to try to do a weekly post on what’s going on, so if there are any questions you’d like me to address, please leave them in the comments and I will do my best [assuming I have the ability to elaborate - I'm pretty out to lunch when it comes to the intricacies of currency and exchange rates, for example].

TODAY’S WEATHER
Moderate winds at the moment, cloudy, with a few showers forecast. Temps fairly mild, though, right now 8°C [46F], sunrise this morning was at 9.31, sunset is due for 4.50 pm. Darkness creeping in, whooooo.

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