29.07.2010 14:01
The exchange rate of the Icelandic króna (ISK) has risen by 10.8% in a single year, and 17.6% from its post-crisis trough at year-end 2008. It is now 5.6% above last year's average. At around this time last year, the euro and the US dollar were trading at 182 and 128, respectively, whereas the two currencies are now trading at 157 and 121. Therefore, by this measure, Icelanders are in a slightly better position than before, although purchasing power is still limited compared to the period before the currency crisis. The ISK has depreciated by about 47% since mid-2007, when the euro cost ISK 84 and the US dollar ISK 62.
The real exchange rate in terms of relative unit labour costs was 7.2% higher year-on-year in Q/2010, according to newly published figures from the Central Bank of Iceland (CBI). The real exchange rate measured by this criterion reveals how wages are developing in comparison with wages in Iceland's main trading partner countries, measured in the same currency and adjusted for developments in productivity. The increase since Q2/2009 is somewhat larger than can be explained by the ISK appreciation alone, as wages have risen more rapidly in Iceland than in its trading partners during the period, even though the pace of wage increases in Iceland has slowed down considerably since the banks collapsed. As a result, wage earners are in a somewhat better position by this measure than they were a year ago, and in comparison with wage earners in trading partner countries. The situation is somewhat poorer than before the crash, however, as the real exchange rate in terms of relative unit labour costs was 40% lower in Q2/2010 than in Q2/2007. In view of this factor and mounting unemployment, it is understandable that labour has flowed out of the country during the period. On the other hand, the domestic labour force is now much more competitive in terms of wage costs, which is helpful to exporters and other domestic firms in the tradable sector. This is particularly true of labour-intensive operations.
Another measure of competitiveness is the real exchange rate in terms of relative consumer prices. This criterion can be used, for example, to assess developments in domestic price levels in comparison with Iceland's chief trading partners, measured in the same currency. Although the real exchange rate has risen by over 17% since it bottomed out after the crisis, in Q2/2010 it was still 33% lower than in Q2/2007. The real exchange rate in terms of relative consumer prices remains well below long-term averages, and far from a level that would ensure equilibrium in external trade. In view of this, there appear to be grounds for the assumption that the real exchange rate will rise in the near future. How much it rises and how long it takes to achieve this equilibrium cannot be predicted with any certainty, however.