Reykajvik (IFN) The Icelandic Ministry of Finance has published a new macroeconomic forecast for 2006-2007 and a projection of developments up to 2010.
The main conclusions are as follows: Provisional national accounts for 2005 indicate that real GDP rose by 5.5 per cent due to rapidly increasing national expenditure. In addition to power project investments, unanticipated innovation in the financial markets had a temporary impact to substantially increase private consumption and imports.
Despite the recent turbulence in financial markets, the profile of the projections is not much changed. This year, real GDP is projected to increase by 4.8 per cent on the basis of a changing composition of growth. The growth in domestic demand and imports decelerates while aluminum exports increase sharply.
National expenditure is expected to contract in 2007, following tight economic policy in recent years and the completion of the current power project investments. Nevertheless, a strong turnaround in trade is expected to result in GDP growth of 1.8 per cent. An unavoidable consequence of the temporary shocks has been a large current account deficit, which amounted to 16.5 per cent of GDP in 2005. The deficit is expected to continue large this year, or 14.4 per cent of GDP, but to decline rapidly in 2007, to 7.7 per cent of GDP. The decline in the exchange rate of the krona accelerates the external adjustment of the economy.
Inflation was around 4 per cent on average for 2005, due to the sharp rise in real property prices. The pace of property price increases has been decelerating rapidly, whereas the sharp decline in the exchange rate in recent weeks will have an inflationary impact on consumer prices.
For this year, inflation is expected to average 5.9 per cent, but this situation is expected to transitory and in 2007 inflation is expected to be .5 per cent.
In the projection for 2008-2010 the economy gradually moves back to equilibrium, with GDP growth and inflation approaching a 2.5 per cent annual rate and the current account deficit down to reach 2 per cent of GDP towards the end of the period.
The Icelandic economy is a part of the international economy, with all associated opportunities and challenges. In international reports the Icelandic economy has been ranked amongst the most competitive in the world, due to its human resources, technological development and efficient structure. The companies, that enjoy a flexible operating environment, are profitable and resilient in adjusting to changeable circumstances.
The position of the Treasury is strong and the assets of households are many times greater than the debts. It is therefore considered a limited risk that the progress achieved in recent years will be stopped or reversed.
The summary can be downloaded at the ministry's homepage. http://www.ministryoffinance.is/Publications/EconomicOutlook/Overview/nr /6068 Remaining chapters are in the process of translation, and a full report in English will be published no later than on April 28th.
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