Boston, MA -- (SBWIRE) -- 10/29/2013 -- The decision of the new centre-right government, elected in April elections, to all but abandon the country's EU membership bid is of little surprise. Given that opinion polls have long suggested citizens would vote against accession and there is a large euro-sceptic majority within parliament, we see the decision as adding to long-term political stability. Indeed, Iceland remains a member of the European Economic Area and has strong international policy anchors within this framework.

Real GDP growth will be slightly above the long-term trend, forecast at 2.6% over our 10-year forecast period. This rate of economic expansion will be among the fastest for any developed nation.

Fostering higher levels of investment will be crucial for the Icelandic government in order to bolster real GDP growth. Residential construction already shows some signs of starting to pick up again, but additional public sector investment in infrastructure will be needed if alternatives to a banking-led long-term growth model is to be found.

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Major Forecast Changes

We have revised up our Icelandic population forecasts and expect the number of people resident in the country to grow by 10% by 2022 to 360,775. This is on the back of continued natural increases in the population, as well as ongoing immigration. This will provide a boost to nominal GDP aggregates, even if per capita measures are slower to improve.

Key Risks To Outlook

Global economic conditions could deteriorate markedly, stifling Iceland's export-driven recovery.

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