Economic forecast by Íslandsbanki Research

22.06.2012
  • Strong economic growth in international comparison 
  • Growth is based on a broad basis of growing consumption, investments and exports 
  • Purchasing power of real disposable income continues to grow and unemployment is subsiding
  • Rising asset prices act to improve equity of households 
  • More stable exchange rate within the capital controls 
  • Inflation continues to fall while the underlying cost inflation persists 
Ingólfur Bender, chief economist of Íslandsbanki, presented the forecast at an open meeting hosted by VÍB, the wealth management division of Íslandsbanki, discussing indexed and nominal interest rates on savings and mortgages. 
Íslandsbanki Research expects economic growth in Iceland to be 2,8% this year and similar growth is expected in the next two years, i.e. 2,7% next year and 3% in 2014. Accordingly, economic growth in Iceland compares favourably in international perspective and is close to the average economic growth in Iceland in recent decades. 

The forecast assumes that economic growth this year and in coming years will be based on a fairly broad basis of growing consumption, investments and exports. Private consumption is estimated to grow by 3% to 3.5% per year until 2014 driven by growth in real disposable income. In addition, asset prices are expected to increase, which will improve the equity of households. The Research team is forecasting a 7% to 8% rise in housing prices over the forecast period. Conditions on the labor market will continue to improve in the coming years as activity increases in the economy. Unemployment will fall and is expected to be around 6% this year and going down to 5% in 2014. The forecast also assumes substantial pay rises in the near future. 

Investment has been picking up lately.  The forecast predicts over 11% growth in investment this year and just over 8% growth next year. Large scale industry projects will have a significant impact on investment levels in the economy in the coming years. The level of investment in the economy will increase in the coming years and become closer to that seen in developed countries.

The low exchange rate will continue to support a modest increase in exports as well as an increase income from the tourism sector. The forecast predicts 3.7% growth in exports of goods and services this year and 2.6% next year. Imports will most likely grow faster due to increased consumption and investment, 4.8% growth is estimated in imports this year and 3.7% next year.

The forecast assumes that the exchange rate of the ISK will remain relatively stable throughout the forecast period and follow seasonal fluctuations. A more stable krona will help reduce inflation which is  expected to subside over the next months. The forecast predicts 5.5% inflation on average this year, 3.6% next year and 4.5% in 2014. Underlying cost inflation will continue to persist and as a result the Central Bank is unlikely to achieve its inflation target over the next few years.

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