Iceland's snap general election, to be held on October 29, is set to be extremely close, with a recent shift in opinion polls putting the incumbent Independence-Progressive coalition almost level with the combined support for the Pirate Party and Left-Green Movement. If the populist Pirate Party comes into government it would mark a major shift in Icelandic politics and policy making.
Iceland's economic rebound will remain in place in the coming quarters, driven predominantly by private consumption, which will be boosted by rising wages and house prices, and a booming tourism sector.
We expect the Central Bank of Iceland to cut interest rates in the coming quarters in an effort to stem recent appreciation of the krona, although the country's strong growth and wide interest rate differentials will drive additional currency strength.
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, or alternatively, a rush of inward capital trying to take advantage of high interest rates. This could have a damaging impact on external competitiveness. 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||2.0||4.0||4.8||4.1|
|Nominal GDP, USDbn||17.2||16.7||15.9||17.9|
|Consumer price inflation, % y-o-y, eop||2.0||1.6||1.0||0.7|
|Exchange rate ISK/USD, eop||127.55||130.18||150.00||142.86|
|Budget balance, % of GDP||-0.1||-0.5||-0.5||-0.4|
|Current account balance, % of GDP||4.1||4.8||4.5||3.2|
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