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Iceland’s Economy Grew in Third Quarter as Recovery Takes Hold

Iceland’s economy grew in the third quarter as the western nation hardest-hit by the global financial crisis shows signs of recovering from its meltdown.

Gross domestic product expanded 1.2 percent from the second quarter, the Reykjavik-based statistics office said in a statement on its website today. The economy contracted an annual 1.6 percent in the period, it said.

The $12 billion economy troughed in the second quarter, when output slumped an annual 7.5 percent led by a 16 percent drop in fixed investment. The government’s decision two years ago to let its lenders fail and protect taxpayers from the cost of a bank bailout may allow Iceland to recover faster than some euro members such as Ireland as exports pick up and households start spending again.

“The economy is expected to hit bottom in the next few months,” said Ingolfur Bender, an economist at Islandsbanki Research, in a note before the report was published. “The pre- conditions for growth have been re-established after a massive correction.”

The failure of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf more than two years ago precipitated an 80 percent decline in the krona against the euro offshore. The currency has been protected by capital controls since the end of 2008. The central bank last month signaled currency restrictions will need to stay in place until at least March to give the island’s financial system longer to stabilize.

To contact the reporter on this story: Omar Valdimarsson in London at valdimarsson@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net

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