Bloomberg News

Iceland Economy Grew 2.4% in First Quarter on Inventories

June 08, 2012

Iceland’s economic growth accelerated in the first quarter as consumer and government spending rose and inventories increased.

Gross domestic product rose 2.4 percent from the previous quarter, after expanding 1.9 percent in three months through December, Reykjavik-based Statistics Iceland said today in a statement on its website. Output grew 4.5 percent from a year earlier, the office said.

Household spending rose 0.3 percent in the quarter and government spending gained 0.4 percent, while total national expenditures climbed 3.4 percent, “owing to a considerable increase in inventories,” the agency said. That offset an 18.6 percent plunge in investments and a 5.6 percent drop in exports.

Iceland is emerging from its 2008 banking meltdown and economic collapse even as Europe struggles to contain a debt crisis. The central bank has raised rates four times since August, bringing its benchmark 5.5 percent. The bank signaled last month more tightening is needed to cool the economy as inflation was 5.4 percent May, above its 2.5 percent target.

“Low interest rates and few investment opportunities due to the capital controls have a rather negative impact on the publics’ view on savings,” Thorbjorn Atli Sveinsson, an economist with Arion Bank hf, said in a note before the release. “We don’t think that the growth in consumer spending is sustainable in the long run, as it’s mostly driven by temporary factors.”

Sedlabanki anticipates it “will be necessary to continue withdrawing the current degree of monetary accommodation as the recovery progresses further and the margin of spare capacity diminishes,” it said in a May 16 statement. “If inflation does not subside in the next few months, other things being equal, it will be necessary to raise nominal interest rates further.”

The island, which completed a 33-month International Monetary Fund program in August, emerged from a banking crisis in part as it renews its focus on previous growth areas such as tourism, energy and fishing.

To contact the reporter on this story: Omar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.

To contact the editor responsible for this story: Jonas Bergman at jbergman@bloomberg.net


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