Country Economic Forecasts > Iceland

Having stayed above 4% in Q1, GDP growth is forecast to slow to 2.7% this year and stay around 2.5% in 2017-19 as the end of capital controls begins a phase of higher capital outflow. Financing this while stabilising the ISK to keep inflation low requires the government to maintain primary fiscal surpluses (now enshrined in the 'organic budget law') and the central bank to keep interest rates above EU levels (although there was a 50bp cut to 5.25% this week to try to stop short-term inflows pushing the ISK even higher).Downside risks to growth are compounded by political uncertainty, with the ruling coalition forced into early elections this year after a backlash that sidelined established parties from June's presidential race. While the current coalition may hang on, it faces a strong challenge from the Pirate Party, which inclines towards retaining some of the present financial regulations and controls, and could win the poll or hold the balance of power.Medium-term growth is also constrained by the limited range of industries that can be expanded to offset the sharp shrinkage of financial services since 2008, the difficulty of reversing net capital outflows despite restored investment-grade credit ratings, the small domestic market, and possible limits on access to currently slow-growing EU markets after the abandonment of accession talks.