I think, though, that we should be prepared for less output growth in the next few years than we expected before the crisis struck. The same can be said for profits in business overall, not to mention the financial sector, where return on equity was puffed up through leveraging that represented an unacceptable level of risk. It should also be borne in mind that economic policy based on an unrealistic level of growth in potential output has decidedly negative consequences. But let us return to Iceland in the here and now. There have been a number of positive developments in the Icelandic economy in the past few months. We have managed to put a floor under the exchange rate: since the beginning of the year, the króna has appreciated by over 12% in trade-weighted terms, and nearly 17% against the euro, without any intervention by the Central Bank. External imbalances have disappeared, and the underlying current account balance is now in surplus. Inflation has fallen from about 18% at the beginning of 2009 to the present 4½%. It is moving rapidly down to the Central Bank inflation target of 2½% and, excluding the effects of tax increases on price levels, will be at target early next year. Concerns that the Icelandic Government will fail to pay instalments on foreign loans in 2011 and 2012 have vanished as the foreign exchange reserves have grown, as I will expand on in a moment.
Before I turn to Iceland’s situation now and in the near future, I would like to place us in a wider international and historical context. Iceland is truly a small country, and individual positive or negative shocks can trigger economic short-term developments that deviate markedly from those in the rest of the world. But in the end, the possibilities are always limited by global trends. Since the latter half of 2009, the global economy has begun to grow again after the recession that followed the peak of the 2008 financial crisis, but there are still a number of questions about what will come next. Output growth varies greatly from region to region, with a number of emerging economies soaring ahead while many of the developed economies hit hardest by the crisis are not growing fast enough to reduce unemployment, and near-term developments are a source of concern. At work here, to some extent, is the long-term tendency for the divide between emerging and developed countries to narrow. The trend is not necessarily a linear one, though; it tends to play out in fits and starts. But in my opinion, more is involved. Last month I had the opportunity to attend a conference held annually in Jackson Hole, Wyoming, by the US Federal Reserve Bank of Kansas City.