Iceland recovery creeps forward in first quarter

STOCKHOLM (Reuters) - Iceland's economy continued to inch out of recession in the first quarter, but conditions remain tough as the country recovers from its worst ever downturn, data from the statistics office showed on Tuesday.

Gross domestic product (GDP) grew 0.6 percent in the first quarter from the fourth quarter for an annual contraction of 6.8 percent, preliminary numbers showed.

The country's fourth-quarter GDP was revised to show a 7.9 percent year-on-year slide after an initially reported 7.0 percent fall. On a quarterly basis, the figure was revised to a 0.7 percent increase from the 3.3 percent initially reported.

"The picture has been that of an improvement quarter-on-quarter ... while the year-on-year numbers have been lagging other countries," said Mats Olausson, analyst at SEB.

He said Iceland's economic recovery would be slow.

The North Atlantic island has been picking up the pieces of its shattered economy following the collapse of its financial system and currency in late 2008.

Aid from international lenders has started to flow, helping the central bank boost depleted currency reserves, exports have been rising and interest rates have come down to 8.5 percent from crisis levels of 18 percent.

Confidence has also started to return to the island, with a Gallup poll recently showing consumers the most upbeat than at any other time since the onset of the financial meltdown.

The Organisation for Economic Cooperation and Development said in its twice-yearly economic outlook that Iceland had made considerable progress in reducing economic imbalances, providing a strong basis for recovery which should see it return to growth of 2.3 percent next year.

Iceland's finance minister told Reuters in a May interview that the government hoped for no more than a 2.5 percent economic contraction this year, with the economy picking up steam in the second half of 2010.