Real GDP growth in Iceland is set to stay strong in the quarters ahead, mainly driven by household spending and fixed investment. A bright spot will continue to be a booming tourism industry, although appreciation of the krona will be a headwind for the industry and ex- ports more broadly. ...The number of foreign arrivals surged by -- y-o-y in July ----, and tourism accounted for nearly one-third of Iceland s export revenue in ----, up from -- in ----. A booming tourism industry has helped the Icelandic economy to diversify away from traditional sectors such as fishing and financial services, and has had key knock-on effects on business investment and household spending. That said, the tourism industry faces two key headwinds which partly underpin our expectation for GDP growth in Iceland to peak in ---- and slow modestly thereafter. ...Large interest rate differential between the eurozone, UK and the US would result in a rapid influx of capital, as investors take advantage of higher returns in Iceland. Such rapid capital inflows could have destabilising effects and lead to the appreciation of the - Business Monitor International Ltd www.bmiresearch.com
...Private Consumption: Large-scale household debt forgiveness following the ---- crisis significantly boosted the long-term outlook for private consumption by diminishing the prospect of a prolonged deleveraging. Household spending was initially slow to recover, but is poised to surpass its pre-crisis peak in ----. ...Government Consumption: We expect public finances to remain on a trajectory of gradual consolidation over the coming decade. The political establishment remains keen to improve its debt and fiscal metrics, as reflected in our forecast for total public debt to fall towards -- of GDP from a peak of --- in ----, and for the budget deficit to remain below -.- of GDP over the next -- years from a peak of --.- in ----. We expect the public spending component of GDP by expenditure to account for around -- of GDP by ----, down from almost -- in ----. ...As private consumption accelerates, business investment will also pick up focusing on the domestic market, for example in non-tourism related services sectors. The residential construc- tion sector has been relatively stagnant since the crisis, but is expected to pick up on the back of improving household balance -- Business Monitor International Ltd www.bmiresearch.com
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