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Iceland Business Forecast Report Q1 2015

  • December 2014
  • -
  • Business Monitor International
  • -
  • 21 pages

Core Views

Recent policy decisions by the government are jeopardising the sustainability of Iceland's economic recovery. The debt relief plan, passed through parliament in late May 2014, will provide a short-term boost to consumption, at the expense of deteriorating external surpluses and reduced ability to meet external debt obligations.
Despite the government set to announce its plan for removing capital controls by end-2014, we expect the process to be drawn out over several years, which will continue to hamper foreign investment into Iceland, capping long-term growth potential. Iceland will remain one of the most politically stable countries globally, even in the face of significant external account uncertainty.

Major Forecast Changes

We have revised our inflation and interest rate projections for 2014 and 2015, following the surprise rate cut by the Central Bank of Iceland in November 2014. We forecast the policy rate to drop another 25 basis points in 2015, to 6.50%, although inflation will pick up slightly to average 3.2%, from 2.3% in 2014, driven by a one-off increase in the VAT rate.

Table Of Contents

Iceland Business Forecast Report Q1 2015
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Index 7
Domestic Politics 8
Scandals, Protests Endanger Reform Efforts 8
Iceland's governing coalition faces increasing pressure as scandals, protests and in-fighting undermine political progress at a crucial
time for the economy. The current climate generates concerns over whether the government will be able to manage a swift and orderly
withdrawal of capital controls, and this uncertainty remains a key risk to both political and economic stability.
Table: Political Overview 8
Long-Term Political Outlook 9
Few Major Threats On the Horizon 9
Over our 10-year forecast period we see Iceland enjoying a high degree of political stability, given a very solid security environment,
few societal dividing lines and a high standard of living. Uncertainty over how and when the government will normalise the country's
economic situation weighs on political continuity, but Iceland will likely remain in the top 20 politically stable countries globally.
Chapter 2: Economic Outlook 11
SWOT Analysis 11
BMI Economic Risk Index 11
Economic Activity 12
Risks Undermine Short-Term Growth Upswing 12
Iceland's economic growth is set to accelerate in the short-term, as the government's debt relief plan spurs domestic demand and
construction begins on new investment projects. However, the growth trajectory is undermined by economic imbalances caused
by capital controls, and uncertainty over how and when they will be removed remains the key drag on the country's medium-term
Table: GDP By Expenditure 12
Monetary Policy 14
Limited Scope For Further Easing 14
The Central Bank of Iceland (CBI) faces major challenges as it attempts to oversee monetary policy and maintain economic stability
amid great uncertainty over the planned withdrawal of capital controls. After November's surprise rate cut, we believe there is limited
room for further monetary easing in the coming quarters as slack in the economy disappears. We expect the CBI will continue to
intervene heavily in the FX market to prevent short-term krona appreciation.
Table: Monetary Policy 14
Chapter 3: 10-Year Forecast 17
The Icelandic Economy To 2023 17
Settling Into More Moderate Long-Term Growth Trend 17
Real GDP growth over our 10-year forecast period is forecast to average 2.3%. This is lower than the 4.7% in the decade to 2007, but
higher than our 2014-2023 eurozone average forecast of 1.4%. However, population growth rather than productivity gains will be a
major driver of economic expansion.
Table: Long-Term Macroeconomic Forecasts 17
Business Monitor International Ltd www.businessmonitor.com 3
Chapter 4: BMI Global Assumptions 19
Global Outlook 19
Warning Signs Growing 19
Table: Global Assumptions 19
Tab le: Develop ed Stat es, Real GDP Growt H, % 20
Tab le: Em erging Mar kets , Real GDP Growth , % 21

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