Stronger growth anticipated

The Icelandic economy is at a turning point due to an anticipated stronger GDP growth. In historical context, GDP growth has been relatively modest during the current upswing. But we expect this to change this year. We forecast GDP growth at 4.3% this year and 4.4% in 2016, followed by a marked slowdown in 2017, to 2.5%.

While it is tricky to forecast near-term economic developments due to the capital controls, we see the lifting of them as an extremely positive move and a major factor in the turning point we now see in the domestic economy.

The GDP growth has been driven mainly by exports but for 2015-2017 we forecast that domestic demand will grow apace. During the forecast horizon we expect labour demand to be met with imported labour to a large degree. This will ease the tension in the labour market and contain wage drift to some extent.

The households are in better shape than before and their equity position has been improving with rising asset prices and declining debt levels. Private consumption growth will be at 4.8% this year, rising to 5.2% in 1016 and 2.8% in 2017.

Inflation will remain close to the Central Bank´s (CBI) inflation target early on and then rise above it as the forecast horizon progresses. The response to this will be further monetary tightening by the CBI´s Monetary Policy Committee (MPC).

There is a risk of overheating during the forecast horizon with the all-too-familiar cocktail containing the usual ingredients: currency depreciation, an inflation spurt, elevated unemployment, and erosion of purchasing power.

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