Iceland’s Economy Shrank in Second Quarter on Inventories

Iceland’s economy contracted in the second quarter on a drop in inventories even as consumer spending and exports advanced.

Gross domestic product shrank 2.8 percent from the first quarter, when it grew a revised 1.9 percent, the Reykjavik-based statistics office said on its website today. Output increased an annual 1.4 percent in the quarter and 2.5 percent in the first six months, the agency said.

“Exceptionally large changes in stocks occurred in the first two quarters of 2011 and there are indications that stocks of aluminum are overestimated and the export underestimated,” the agency said “Most likely these changes have distorted the seasonal adjustment and therefore an aggregation of these two quarters gives a more reliable picture of the developments in the first half of 2011.”

The government’s decision three years ago to let its lenders fail and protect taxpayers from the cost of a bank bailout is allowing Iceland’s $12 billion economy to recover faster than some debt-stricken euro members such as Ireland as exports pick up and households start to spend.

Exports rose 1.4 percent from the first quarter, while household spending increased by 1.8 percent, the agency said. Investment jumped 7.7 percent, while overall national expenditure fell 3.9 percent.

‘Inner Growth’

“Inner growth, driven by private consumption, continues to rise, somewhat due to tourism,” said Asgeir Jonsson, an economist with asset manager GAMMA, by phone. “It’s also positive that these figures indicate that it’s unlikely that there will be an overheating in the economy as we move forward, which is something that the central bank has been pointing out to some extent.”

Iceland’s central bank last month raised its benchmark interest rate for the first time since 2008 when its banks collapsed to cap inflation. The seven-day collateral lending rate was raised a quarter of a percentage point to 4.50 percent.

The failure of Kaupthing Bank hf, Landsbanki Islands hf and Glitnir Bank hf precipitated an 80 percent decline in the krona against the euro offshore. Capital controls has protected the currency since the end of 2008 and parliament is now debating a bill to extend restrictions through 2015 to give the island’s financial system longer to stabilize.

IMF Review

Credit default swaps on Iceland’s five-year debt were at 272 basis points on Sept. 7, compared with a 358 basis point average for the 27-member European Union, CMA prices show.

The island completed a 33-month International Monetary Fund program last month after the Washington-based lender established that all economic “objectives have been met and the country is on the road to recovery,” according to an Aug. 26 statement marking the island’s final review.

The IMF praised the central bank’s decision to raise rates as an appropriate measure to tame inflation as import prices rise. Consumer price growth held at 5 percent in August, the highest level since June 2010. The krona has lost 5.8 percent versus the euro this year.

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

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

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