Tuesday May 12, 04:22 PM
Iceland economy to shrink more than expected
By Svanborg Sigmarsdottir
REYKJAVIK (AFP) - Iceland's economy will shrink 10.6 percent in 2009, the finance ministry said Tuesday, revising downwards an earlier forecast in January of a 9.6 percent contraction.
"The economic outlook for this year is dark. The economy is suffering because the finance sector is not fully reorganised or recapitalised," the ministry said in its latest economic report.
A North Atlantic island of just 320,000 inhabitants, Iceland saw its economy crash in October when its three main banks collapsed, bringing to a screeching halt a decade of prosperity in which growth averaged 4.0 percent a year.
Thousands of Icelanders lost their jobs and their savings in the collapse, which also brought down the government. The International Monetary Fund (IMF) came to Reykjavik's rescue in November with a loan of 2.1 billion dollars.
The finance ministry said Tuesday it expected the economy to begin a slow recovery next year, when it predicted the economy would grow 0.5 percent instead of remaining flat as previously forecast.
"It is expected that recovery will start in full force in 2011, with 5.0 percent (growth)," it said.
Inflation is expected to average 10.2 percent for the full-year 2009 but will be close to 3.5 percent at the end of the year. For 2010, inflation is expected at 1.6 percent, before rising to 1.9 percent in 2011.
Unemployment, which was largely non-existent in Iceland before the crisis, is expected to hit 9.0 percent this year, up from the previous forecast of 7.8 percent.
It will rise further to 9.6 percent in 2010, compared to the 8.6 percent forecast in January, before falling back to 7.5 percent in 2011.
Last week, the central bank slashed its benchmark interest rate by 2.5 points to 13 percent -- its third cut in two months -- in an effort to boost critical credit flows to combat the recession.
Iceland's newly elected left-wing government said Sunday it plans to balance the budget by 2013 and undertake a series of measures to restructure the nation's beleaguered banks.
At the same time, the coalition led by Prime Minister Johanna Sigurdardottir's Social Democrats said it wants to launch "an ambitious plan of job creation and innovation to restore Iceland's position among the most energetic and competitive states in the world by 2020."
Sigurdardottir also said during her election campaign that she would aim to take Iceland into the eurozone within the next four years, arguing that adopting the single currency would provide greater monetary stability for the North Atlantic island.
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