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Iceland's economy continues to recover from the financial crisis but still has a long way to go says OECD

Iceland's economy continues to recover from the financial crisis but still has a long way to go according to a report today from the  Paris-based Organisation for Economic Cooperation and Development (OECD).

The report says output has finally stabilised following the severe recession, but real GDP (centred 4-quarter moving  average) lingers 11% below its peak in the first quarter of 2008, which was well above sustainable levels.

This decline was one of the largest in the OECD and the largest in Iceland in recent decades. Domestic demand has levelled off, but a consumption and business investment-led recovery is projected to gather momentum over the next two years, lifting economic growth to 3% by 2012.

The main uncertainty to the outlook concerns the timing of large investment projects, which has  increased following the recent vote against the Icesave agreement on April 9, 2011 with the UK and the Netherlands in respect of compensation claimed for bailing out depositors of the failed online bank.

Today's report says the government has made good progress in cutting the large budget deficit left by the financial crisis, but much consolidation is still required to put public finances on a sustainable path. The general government budget deficit (excluding one-off transactions) fell by 3½ per cent of GDP to 6½ per cent in 2010 (7.8% of GDP including the cost of called loan guarantees) and a similar decline is projected in 2011.

The government plans to achieve a primary budget surplus of at least 3% of GDP in 2013 and to increase it gradually in the following years.

Overview of the Economic Survey of Iceland 2011 (pdf)