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Glitnir bank publishes economic forecast for Iceland


Glitnir Research has published a new macroeconomic study of the Icelandic economy for the next four years.

Nordic bank Glitnir has released a report explaining the likely future of the Icelandic economy.
A two-year levelling off period has begun in the Icelandic economy, a period when the economy will reach equilibrium after rapid growth and overheating in recent years. Growth will be minimal this year and next.

External market conditions are difficult as oil and commodity prices remain high. Internally the market is adjusting to the completion of large-scale industrial developments and a cut in the cod quota.

Domestic demand looks set to shrink this year and next, but the contraction is offset by an improvement in external trade. Glitnir expects the current account deficit to exceed 14% of GDP this year but be less than 10% as early as next year, and just 5-6% in 2010-11.

The report says the current inflation spike is caused by high interest rates, but will be short-lived. Glitnir forecasts that inflation will be around 8% this year, but that it will be close to the Central Bank’s target of 2.5% by mid-next year.
In recent years house prices have been one of the main drives behind inflation, but decreasing house prices will help curb upcoming inflation. The labour market also looks set to slacken gradually in the near term. The Bank’s forecast assumes 1.6% unemployment this year and 4% in 2010.

Glitnir believes the four-year interest rate hike period has ended and forecast that the Central Bank will lower its key policy rate in September and bring the rate to 14.75% by year-end. As the economy cools down the policy rate is expected to lower rapidly– probably standing at 8% by year end 2009.

Economic growth should increase considerably in 2010 and 2011, with domestic demand and favourable external trade joining forces. External conditions are expected to have improved and the report predicts growth of 3.8% in 2010 and 4.6% in 2011.
For the full research report visit the Glitnir corporate website at


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