Support for the coalition government has declined significantly since it was elected, its cohesiveness will continue to be tested in a tricky period for future of the economic recovery.
The overall macroeconomic backdrop is increasingly healthy, though this is partly due to the artificial support of capital controls.
Though the government remains cautious the complex process of removing capital controls still poses potentially massive risks to economic stability.
Major Forecast Changes
We have revised our inflation and interest rate projections for 2015 and 2016 as wage increases are likely to stoke inflation. We now forecast the policy rate to increase to 6.00% by end-2015. We maintain our forecast of 6.50% at end-2016. Inflation will pick up to average 1.5% in 2015, from 1.0% in 2014, driven by wage increases. We have raised our 2016 average inflation forecast to 2.5%.
We have adjusted our real GDP growth forecast for 2015 from 3.2% to 3.5%. Similarly, we have increased our forecast for 2016 from 2.6% to 3.0%.
Key Risks To Outlook
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.
Macroeconomic Forecasts (Iceland 2013-2016)
| Indicator || 2013 || 2014 || 2015f || 2016f |
| National Sources/BMI |
| Real GDP growth, % y-o-y || 3.6 || 1.9 || 3.5 || 3.0 |
| Nominal GDP, USDbn || 14.6 || 15.8 || 16.0 || 15.9 |
| Consumer price inflation, % y-o-y, eop || 3.7 || -0.4 || 1.5 || 2.5 |
| Exchange rate ISK/USD, eop || 115.18 || 127.55 || 131.17 || 136.63 |
| Budget balance, % of GDP || -2.1 || 0.5 || -0.5 || -1.0 |
| Current account balance, % of GDP || 3.9 || 0.2 || -1.0 || -2.5 |
Table of Contents
Chapter 1: Political Outlook
BMI Political Risk Index
Further Tests For Coalition Unity Ahead
Chapter 2: Economic Outlook
BMI Economic Risk Index
Capital Controls Undermine Healthy Economic Backdrop
Capital Controls To Be Wound Down In 2015
Chapter 3: 10-Year Forecast
The Icelandic Economy To 2024
Settling Into More Moderate Long-Term Growth Trend
Table: Long-Term Macr oeconomic Forecasts
Chapter 4: BMI Global Macro Outlook
Table: Global Assumptions
Table: Developed Stat es, Real GDP GrowtH, %
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table: Emerging Markets , Real GDP Growth , %
The Iceland Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Iceland. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.
An influential new analysis of Iceland's economic, political and financial prospects through end-2019, just published by award-winning forecasters, BMI Research.
- Forecast the pace and stability of Iceland's economic and industry growth through end-2019.
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- Contextualise Iceland's country risks against regional peers using BMI's country comparative Risk Index system.
- Evaluate external threats to doing business in Iceland, including currency volatility, the commodity price boom and protectionist policies.
The Iceland Country Risk Report by BMI Research includes two major sections: Economic Outlook and Political Outlook.
How will the Iceland' economic policy-making and performance impact on corporate profitability over 2015-2019?
BMI provides our fully independent 5-year forecasts for Iceland through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.
Economic Outlook Contents
The Iceland Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.
Key Areas Covered:
- Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
- BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.
- Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
- Balance of Payments - trade and investment, current and capital account.
- Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
- Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
- Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
- Foreign Direct Investment - approvals, inflows and climate.
- External Debt - debt profile (short and long-term plus public and private sector obligations).
- Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.
- Rely upon BMI's 100% independent forecast scenarios for Iceland and underlying assumptions - we take no advertising and are privately-owned.
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What are the political risks to doing business in Iceland over the next 5-years?
BMI's Iceland country Risk Index evaluates the short- and medium-term threats to political stability.
Political Outlook Contents
- SWOT Analysis for the Iceland Market - Political Strengths, Weaknesses, Opportunities and Threats facing Iceland.
- Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Iceland's risk are compared with regional and global averages.
- Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
- Long-Term Political Outlook BMI examines the structural risks to the stability of Iceland’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.
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*Not all Country Reports contain the Key Sector Outlook chapter. Please enquire above for more information.