Despite the rapid rise in popularity of Iceland's anti-establishment Pirate Party, we remain sceptical that it will win power in the April 2017 general elections. Instead, the Pirates' popularity will prompt the ruling coalition to pursue a more expansionary fiscal policy in 2016, which will allow it to regain public support.
Iceland's economic rebound will slow modestly in 2016, due to weaker demand from the eurozone and rising uncertainty around the lifting of capital controls this year.
The Icelandic krona will come under pressure with the start of capital account liberalisation in the coming months. Krona depreciation will add to rising wage-pull inflationary pressures in H116, warranting monetary tightening, which will stabilise the currency in H216.
The biggest risk to our forecast is policy trajectory, particularly in terms of how the current government chooses to remove distortive capital controls. Mishandling of the capital account liberalisation process has the potential to trigger a sell-off in the krona, Similarly, taking a hard stance with regards to capital withdrawals by foreign creditors could damage long-term investor sentiment towards Iceland.
|Real GDP growth, % y-o-y||1.9||4.1||3.8||2.9|
|Nominal GDP, USDbn||16.3||15.1||14.3||15.6|
|Consumer price inflation, % y-o-y, eop||0.8||2.0||3.0||2.5|
|Exchange rate ISK/USD, eop||127.51||130.10||150.00||142.86|
|Budget balance, % of GDP||-0.2||0.0||0.1||0.1|
|Current account balance, % of GDP||4.4||3.2||2.1||0.9|
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