FRANKFURT (MNI) – Iceland’s recovery from its colossal financial
and banking crises is expected to accelerate next year, the
International Monetary Fund staff concluded Monday.
Next year growth should reach 3% after contracting by 3% this year,
the organization said in its Article IV Consultation Staff Report on the
Nordic country.
Looking forward, net exports are thought to contribute less to
total growth, while “a revival of investment and ultimately consumption
is projected to generate a slow recovery going forward,” the IMF wrote.
“The recovery is forecast to pick up steam in 2011, with growth
reaching 3%, boosted by planned investments in power-intensive sectors
(which will temporarily reduce the current account surplus),” it added.
The trend of falling inflation rates in the embattled country is
also expected to continue. The twelve-month rate is likely to be below
5% by year’s end, down from 18% in 2008.
Still, the outlook for both growth and inflation is subject to
“considerable uncertainty,” the staff warned.
Regulatory hurdles as well as further volcanic eruptions could
weigh on growth, the staff commented. With respect to inflation, wage
pressures could drive prices higher.
“Wage bargaining in Iceland is fairly centralized, and past
post-recession patterns in Iceland point to the risk that wage increases
in the tradable sector spread to non-tradables, sparking cost-push
pressures,” the Fund wrote.
“The Stability Pact with labor and employer organizations has to
date been a vehicle to manage such pressures, but has broken down. The
authorities agreed that it would be important to revive it during the
fall 2010 wage negotiation rounds,” the staff observed.
Iceland’s banking and financial systems collapsed two years ago in
the wake of Lehman Brothers’ bankruptcy. Since then, it has gradually
stabilized, thanks at least in part to a USD 2.1 billion IMF loan at
the end of 2008.
–Frankfurt bureau; +49-69-720142; frankfurt@marketnews.com
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