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Iceland's next collapse is 'unavoidable,' employers union warns

Multicolored rooftops and the harbor are seen on the city skyline in Reykjavik, Iceland. The head of Iceland's main employers' group says the nation is displaying some worrying signs.

[REYKJAVIK]The head of Iceland's main employers' group says the nation is displaying some worrying signs.

Wages are soaring much too fast and will ruin the economy if they continue unchecked, according to Thorsteinn Viglundsson, managing director of Business Iceland.

"Another economic collapse is unavoidable, if we're going to keep going down this path," Mr Viglundsson said in a phone interview in Reykjavik.

Pay is set to rise about 30 per cent through 2019 in many industries. Unions wanted increases as high as 50 per cent, to compensate for years of moderate pay growth, but some were forced to settle for less after the government put the matter to an arbitration court.

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Icelanders, who work longer hours than their Nordic peers according to the Organization for Economic Cooperation and Development, are demanding a bigger share of the island's economic recovery after eight years of belt-tightening. Pay growth has barely kept pace with inflation, with real wages rising little more than 3 percent in the six years through 2014, statistics office figures show. Over the same period, real gross domestic product grew 29 per cent.

Mr Viglundsson says wage growth above 25 per cent through 2019 will have "very serious economic consequences." "It will mean a surge in inflation, to which the central bank will respond by raising rates considerably," he said. Iceland's main policy rate is already above 6 per cent, a developed-world record.

"It will mean that, in the end, the krona will lose its value, like it has always done in the past under similar circumstances," Mr Viglundsson said.

Wage pressure has been percolating as Iceland struggles to end seven years of capital controls without disrupting its currency market. The central bank earlier this year warned that excessive pay increases could jeopardize that process, which officials plan largely to have completed by the end of the year.

If Iceland wants to avoid a repeat of the high-inflation- high-rate experiment that turned it into a magnet for carry traders last decade, employers and labor unions must reach a sustainable agreement, Mr Viglundsson said. He also pointed to what he said are weaknesses in Iceland's monetary policy framework.

"It's very important to reconsider Iceland's monetary policy," Mr Viglundsson said. "It needs to take into account more aspects, such as a stable real exchange rate, not just the inflation goal. "