Reykjavik — Gudrun Asta Gunnarsdottir found herself at ground zero of Iceland’s latest crisis. Four months into her second pregnancy, the check-in desk operator was told she was one of 315 workers being laid off at Reykjavik’s international airport.

The news came as “a shock” and “caused a lot of sadness for everyone, especially because a lot of people are now looking for work at the same time”, said Gunnarsdottir, who was able to return part-time to her airport job.

The collapse of Wow Air in March is sending ripples through the tiny north Atlantic island, whose spectacular recovery from financial collapse a decade ago was built to a large extent on attracting foreign visitors, thanks in part to its location for the filming of popular television series such as Game of Thrones.

The sudden cut in supply caused by Wow Air’s bankruptcy, coupled with high prices and a general drop in demand as a result of a global slowdown, mean the latest numbers look dire. Visitors plunged 24% in May from the same period in 2018 and the all-important summer season is looking shaky. Last month, the central bank pulled the emergency lever to cushion the blow and delivered a half a point rate cut, while the government has pledged to boost stimulus if needed.

“We are prepared for the possibility of a deeper recession, and the numbers we are getting on tourist arrivals seem to indicate that may happen,” central bank governor Már Guðmundsson said in an interview in Dubrovnik.

Sharp downturn

After 20 quarters of uninterrupted growth — the longest upswing in its recent history — Iceland is bracing itself for a sharp downturn. Forecasts for 2019 vary widely, with Arion Bank predicting a slump as deep as 1.9%, but there’s a general consensus that the nation is facing its worst contraction since the financial crisis.

Unemployment, while still low in an international context, has risen to 3.6%. It was below 3% at the start of the year.

For all of 2019, the number of visitors could drop 17%, according to forecasts from the Keflavik Airport’s operator. Hotel owners are already feeling the pinch, with overnight stays falling an annual 5% in April and the total number of employees in tourism-related sectors decreasing by a similar percentage in May.

“May’s drop in tourist numbers is larger than we were expecting,” said Skapti Örn Ólafsson, a spokesperson for the Icelandic Travel Industry Association.

Newly resilient

Despite these concerns, the country is now better positioned to weather the storm. Almost a decade of solid growth has replenished the state’s coffers; the central bank has ample margins to cut rates (the benchmark rate now stands at 4%); and the capital controls introduced in the wake of the financial crisis have now all but been removed.

“We have never been as well prepared in our history to deal with adverse situations as we are now,” Guðmundsson said. “We have policy space, with a lot of scope to cut rates if necessary.” Iceland’s central bank is due to announce its latest rate decision next week.

Investors are also so far bullish that Iceland will come out okay. Last week, the country sold €500m in five-year bonds, in a deal that was almost five times oversubscribed.

The government hasn’t yet announced any specific plans for the tourism sector, but parliament is currently discussing how to spend a 1% budget surplus dividend originally penciled in for 2019. Still, the impact can be clearly felt on the ground.

Haukur Einarsson, the owner of the 10-room Alfholl guest house in the centre of the capital, says he has had to cut prices by as much as 30% in the face of a sharp drop in demand. One silver lining is the currency’s recent swoon. After rallying sharply since 2015, it has weakened about 20% against the dollar. “If the króna was as strong as last summer it would be very bad,” said Einarsson. 

And being used to years of booms and busts, Icelander’s are resilient. “Even though we are going through a slump, we will regain our former strength,” said Ólafsson at the travel industry lobby. “In 18 to 24 months, we will hopefully be back on track.”