Boston, MA -- (SBWIRE) -- 04/29/2014 -- Public resentment towards the government's decision not to allow a referendum on EU membership is threatening cohesion of the current administration. Plummeting support for the governing Progressive Party means we could see a change in key personnel over the course of 2014, although policy trajectory is unlikely to change.
Real GDP growth will be slightly above long-term trend at 2.4% over our 10 year forecast period. This rate of economic expansion will be amongst the fastest for any developed nation, but it will still take until 2015 for real GDP to reach pre-crisis levels.
The government's planned US$1.25bn mortgage debt relief package will not be a panacea. The previous administration's previous rounds of relief did not spark significant extra consumer spending or investment in housing. The plans also threaten to erode much of the improvement experienced in Iceland's current account position over recent quarters.
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Major Forecast Changes
We have revised our medium-term krona forecasts, as we had not expected the currency's appreciatory trend to be quite so pronounced in recent months. Nevertheless, while we are not forecasting the unit to average ISK117.00/US$ over the course of 2014, from ISK125.50/ US$ previously, this still implies weakness from current levels, with further depreciation highly likely over the duration of our 10-year forecast horizon. If the currency continues to strengthen over the next few quarters, the selloff will be much more aggressive when it does eventually play out.
Key Risks To Outlook
Global economic conditions could deteriorate markedly, stifling Iceland's export-driven recovery.
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