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Iceland GDP Grew Last Quarter as Recovery Takes Hold

Dec. 7 (Bloomberg) -- 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 after shrinking 0.3 percent in the previous period, the Reykjavik-based statistics office said in a statement on its website today. It was the first quarterly growth in two years. Output contracted an annual 1.6 percent in the period, the office 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 debt-stricken euro members such as Ireland as exports pick up and households start to spend.

“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 GDP 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.

Investment ‘Low’

Exports grew 0.8 percent from the previous quarter, while household spending increased 3.8 percent, the office said. Investment fell 5.6 percent while overall national expenditure rose 4.2 percent.

“The investment level is very low at present, but this is common in the wake of a twin currency and banking crisis,” Bender said. “Investment far above the current pace will be needed to keep GDP growth at acceptable levels for the long term.”

The economy will expand 0.9 percent in 2011, 2.9 percent in 2012 and 3.3 percent in 2013, Bender estimates.

The country reported a 10.4 billion kronur ($91 million) trade surplus in November, according to a separate report published today. The krona has gained 12.4 percent against the dollar since the end of June, making it the fifth-best performer against the greenback after the Australian dollar, the Swedish krona, the Chilean peso and the Polish zloty, according to data available on Bloomberg.

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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