Iceland economy grows at fastest pace in four years

STOCKHOLM Fri Jun 8, 2012 10:54am EDT

STOCKHOLM (Reuters) - Iceland's economy expanded in the first quarter at its fastest pace since its near-meltdown, powered by a surge in exports, tourism and domestic consumption.

Gross domestic product (GDP) grew 2.4 percent quarter-on-quarter in the first three months of the year to put annual economic growth at 4.5 percent in the period, the highest since the first quarter of 2008, data from the statistics office showed on Friday.

"It shows that the economy is growing rather rapidly, at least in an international comparison, at the moment," Islandsbanki Chief Economist Ingolfur Bender said.

"The increase is broad-based, driven by consumption, investment and exports."

Growth for the fourth quarter of 2011 was 1.9 percent on the quarter and 2.7 percent on the year.

The recovery has gathered momentum more quickly than expected after the small nation became a byword for the excesses of the liquidity boom which preceded the 2008 meltdown.

Its bank sector grew to 10 times the size of output and then collapsed when credit markets froze after the bankruptcy of Lehman Brothers.

Iceland successfully completed a bailout program led by the International Monetary Fund last year and has returned to bond markets. Forecasts for 2012 indicate GDP growth will be the strongest among developed countries, the central bank has said.

While investments have begun to recover from lows reached after the bank collapse, the relative weakness of the Icelandic currency has lured tourists.

Guest nights in Icelandic hotels by foreign tourists rose by 17 percent year-on-year in April. Islandsbanki said the number of tourists departing from the main airport hit a record in May, helping the economy of the country of only about 320,000 people.

The data released on Friday showed exports and consumption grew 4.2 percent year-on-year in the first three months of the year while investment grew 9.3 percent, though from low levels.

Iceland said last month it would offer overseas investors who have crowns they don't want another chance to sell their currency as the country seeks to remove the capital controls put in place during the 2008 crash.

Reducing the overhang of foreign-held crowns in a controlled manner should make it easier to loosen capital restrictions in the long run and encourage investment in the country.

(Reporting by Niklas Pollard, editing by Patrick Lannin, Adrian Croft)

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