|Iceland continues to recover from its financial crisis. Economic growth strengthened in the second half of 2014 and GDP is approaching its pre-crisis peak level. Lower inflation, exchange rate stability, declining unemployment and improved fiscal accounts are all signs of macroeconomic normalisation. The recovery will continue to be driven by private consumption and business investment.While exports are projected to expand steadily, even with deteriorating competitiveness, they will be outpaced by imports and the current account balance will therefore deteriorate gradually.
Budget outturns have been more favourable this year than foreseen. Fiscal consolidation will slow in 2015, but will remain sufficient to achieve some debt reduction. Containing public spending pressures will be important in maintaining an appropriate budgetary stance.With labour market slack disappearing, monetary policy will have to continue to focus on possible inflationary pressures. When the conditions are appropriate, exchange controls should be dismantled, because they are detrimental to business conditions.
Note: All data definitions based on internationally comparable standards and may differ in specific cases from common national definitions.