Iceland Economic Outlook for Q1 2008
The state of the Icelandic economy has altered since our last forecast, after the deepening of the sub-prime crisis on the international markets. The economy is more cooling down, opening up the possibility that the Central Bank of Iceland will cut interest rates sooner than previously forecast.
Highlights of the forecast:
- Economic growth in 2008 will be low due to decreasing private consumption and fewer investments. Kaupthing Research expects economic growth levels around 3.3% in 2007, 0.9% in 2008, 2.5% in 2009 and 4.6% in 2010. Growth in 2009 and 2010 will mainly be driven by a turnaround in exports, attributed to higher aluminium exports and fewer imports.
- The current account deficit is expected to drop from 26% of GDP in 2006 to 12% of GDP in 2007. Moreover, we expect the deficit will be around 10% for 2008, 8% for 2009 and 6% of GDP for 2010. Research expects the announcement of a new aluminium smelter in Helguvík and that construction will commence this year.
- The ISK will depreciate this year, according to our forecast. The average value of the trade weighted index will be 136 points in mid year 2008, although we expect it to appreciate again slightly at the end of the year.
- Inflation will fall rapidly throughout 2008. The Central Bank is expected to reach its inflation target of 2.5% in the first half of 2009, mainly due to a cool down in the real estate market.
- Research expects interest policy rate cuts this year, starting in February and reaching 9.75% at the end of this year. The lowest level will be attained in 2009, where interest rates are expected to hit 6.5%.
- Yields on Icelandic bonds are expected to decrease in 2008 and the first quarter of 2009, primarily due to lower interest rates. If our forecast is correct, the 12 month return will be relatively high.
To read the whole forcast visit: http://www.kaupthing.com/lisalib/getfile.aspx?itemid=13597
Asgeir Jonsson, head of the analysis department of Kaupthing Bank.
About Kaupthing Bank
Kaupthing Bank offers comprehensive commercial and investment banking services to individuals, companies and institutional investors. The Bank is a leading player in all the main areas of the Icelandic financial market, and in addition to Iceland, the Bank's key markets are Denmark and the United Kingdom. The Bank focuses on the growth and development of its international activities and aims to be one of the leading investment banks in northern Europe.
Kaupthing Bank operates in thirteen countries with its headquarters located in Reykjavík. The Bank's main subsidiaries are FIH Erhvervsbank in Denmark, Kaupthing Singer & Friedlander in the United Kingdom, Kaupthing Bank Sverige, Kaupthing Bank Luxembourg, Kaupthing Bank in Finland, Norvestia Oyj in Finland, Kaupthing New York, Kaupthing Switzerland, Kaupthing Bank Belgium and Kaupthing Bank Norge in Norway. The Bank also has activities in Isle of Man, the United Arab Emirates (Dubai) and Qatar. As of 31 December 2007 the number of full-time equivalent positions was 3,334 at Kaupthing Bank and its subsidiaries. www.kaupthing.com
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