November 15, 2017 / 10:29 AM / a year ago

UPDATE 2-Fish strike hits Iceland, central bank sees slower growth

* Central bank expects economic growth to be halved this year

* Gradual slowdown may not be such a bad thing - Arion Bank

* Wage restraint vital at upcoming negotiations - Arion Bank (Adds analyst quotes, details)

By Teis Jensen

COPENHAGEN, Nov 15 (Reuters) - Iceland’s central bank has slashed its 2017 growth forecast due to a slowdown in export growth partly caused by a fishing industry strike and now expects the economy to grow only half as fast as last year, it said on Wednesday.

But a gradual slowdown might not be a bad thing for an economy that has seen its share of hard landings, most recently after the global financial crisis in 2008.

“This slowing down is actually quite positive for the economy, because this GDP growth is then more in line with the growth in Iceland’s production capacity,” analyst Erna Bjorg Sverrisdottir of state-owned Arion Bank said.

The central bank now foresees economic growth of 3.7 percent this year, down from an earlier forecast of 5.2 percent and compared with a 7.2 percent expansion in 2016.

The central bank expects growth next year to match 2017’s and then ease towards the long-term trend growth of around 2.5 percent per year in 2019 and 2020.

The Nordic island of 340,000 people has since the 2008 crisis enjoyed an economic rebound fuelled by a tourism boom, but the central bank said export growth had eased after a surge in late 2016, even though the global economy has picked up.

“It appears that it has taken longer to make up the production loss in the fishing industry following the fishermen’s strike at the beginning of the year,” the central bank said.

Growth in service exports had also subsided more quickly than it had assumed when it gave its last forecast in August.

“Furthermore, there are signs that marine product prices, the main source of the past few years’ improvement in terms of trade, fell in Q3,” the bank said.

Three parties spanning the political spectrum are currently in talks to form a new government after Icelanders ousted their centre-right government in an election last month.

Some hope that a broad coalition could bring more political stability to the country after a string of scandals that have hurt trust in government in recent years.

One of the most urgent tasks for any new administration will be to pass the budget for next year.

Besides the new government’s fiscal policies, future economic development will also depend on the wage restraint shown when a big lump of private and public wage deals are renegotiated in the near future, Sverrisdottir said.

If wages grow faster than productivity, it may lead to a depreciation of the Icelandic crown and higher inflation.

“This is the usual cycle we have seen so far in Icelandic history. It would be great if we could not go there,” Sverrisdottir said.

Reporting by Teis Jensen; Editing by Catherine Evans

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