Iceland Country Risk Report Q1 2016
We expect divisions in Icelandic politics to become more stark asthe schisms exposed by the country's response to the migrant crisisand Paris terror attacks comes to the fore. An initially welcomingstance has moderated following the Paris attacks, and we expectto see rhetoric from the pro-immigration Pirate Party and the morereticent Progressive Party wing of the coalition government escalatefurther.
Strong high-frequency economic indicators have prompted us torevise up our forecasts for Iceland's real GDP growth for 2016 and2017. The economy remains on a solid footing, driven by a sustainedrebound in domestic demand, with private consumption being themain driver of growth in the coming quarters.
Inflationary pressure will build in 2016 from rising wages and foreignexchange pass through. This will necessitate continued tightening bythe Central Bank of Iceland, underpinning our forecast for the mainmonetary policy rate to rise to 7.00% by end-2016, from 5.75% atend-2015.
Major Forecast Changes
Whereas previously we expected real GDP growth of 3.5% for 2015and 3.1% for 2016, we now estimate 4.1% growth in 2015 and 3.8%in 2016 on account of stronger high-frequency indicator readings inH215.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic Politics
- Political Divisions To Widen Over Migrant Crisis
- We expect divisions in Icelandic politics to become increasingly stark as the schisms exposed by the country's response to the migrant
- crisis and Paris terror attacks come to the fore. An initially welcoming stance has moderated following the Paris attacks, and we expect
- to see rhetoric from the pro-immigration Pirate Party and the more reticent Progressive Party wing of the coalition government escalate
- TABLE: POLITICAL OVERVIEW
- Long-Term Political Outlook
- Few Major Threats On the Horizon
- Over our 10-year forecast period, we see Iceland enjoying a high degree of political stability given a very solid security environment,
- few societal dividing lines and a high standard of living. Uncertainty over how and when the government will normalise the country's
- economic situation weighs on political continuity, but Iceland will likely remain in the top 20 politically stable countries globally.
- Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Rebound On A Solid Footing
- Strong high-frequency economic indicators have prompted us to revise up our forecasts for Iceland's real GDP growth for 2016 and
- 2017. The economy remains on a solid footing, driven by sustained rebound in domestic demand, with private consumption being the
- main driver of growth in the coming quarters.
- Monetary Policy
- Rising Inflation In 2016 Necessitating Hawkishness
- Inflationary pressure will build in 2016 due to rising wages and foreign exchange pass through from króna weakness. This will
- necessitate continued tightening by the Central Bank of Iceland, underpinning our forecast for its main monetary policy rate to rise to
- 7.00% by end-2016, from 5.75% at end-2015.
- Chapter 3: 10-Year Forecast
- The Icelandic Economy To 2024
- Settling Into More Moderate Long-Term Growth Trend
- Iceland's Real GDP growth over our the 10 years to 2024 is forecast to average 2.2%. This is lower than the 4.7% in the decade to
- 2007, but higher than our 2015-2024 eurozone average forecast of 1.4%. However, population growth rather than productivity gains will
- be the major driver of economic expansion.
- TABLE: LONG-TERM MACROECONOMIC FORECASTS
- Chapter 4: BMI Global Macro Outlook
- Global Outlook
- Emerging Markets Bending, Not Breaking
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %