After contracting sharply the Icelandic economy has recovered nicely and is showing signs of tension. We predict a roughly 7% GDP growth for the current year, as exports steadily take over from domestic demand as the main driver. The growth will be considerably slower in the latter two years of the forecast period as exports continue to weigh heavily. The increase in number of tourists will play a key role, along with the export of intellectual property, fish farming and export of pelagic fish.
We believe inflation has peaked and will subside over the forecast period as housing prices rise at a slower rate and import prices stabilize. The labour market remains a cause of uncertainty and we predict an increase in the purchasing power of wages as soon as next year. Persistent inflation calls for monetary restraint by the Central bank, but it looks like the policy rate will peak at 6% this year and begin to subside again next year.
