UPDATE 1-Iceland economy stays on recovery track

Fri Sep 7, 2012 6:08pm IST

* First half GDP grows 2.4 pct yr/yr

* Steady recovery since 2008 banking meltdown (Adds background, analyst comment)

STOCKHOLM, Sept 7 (Reuters) - Iceland's gross domestic product grew an annual 2.4 percent in the first half of the year, data showed on Friday, maintaining a steady pace on the road back to economic health from the crisis that claimed its banks in 2008.

"I would say there is a decent, ongoing recovery," Mats Lind, emerging markets strategist at SEB said.

The North Atlantic island's banking sector collapsed in late 2008, plunging the economy into recession and forcing the government to seek billions of dollars in aid from the International Monetary Fund and other lenders.

After contractions of 4 percent in 2009 and 6.6 percent in 2010, Iceland bounced back to growth of 2.6 percent last year.

But sluggish demand for fish and aluminium - the country's main exports - has kept the recovery relatively subdued while the global downturn has hampered a growing tourism sector.

Growth was 0.5 percent between April and June, the slowest pace since the final three months of 2009, though analysts said this was due to a fall in volatile fixed capital formation.

"Our current full-year GDP forecast is for 2.8 percent growth, so we haven't been expecting very rapid growth," said Ingolfur Bender, economist at Islandsbanki.

Trend growth in Iceland has been above 3 percent for decades, Bender said, meaning the economy is still being hampered by subdued demand due to the turmoil in the euro zone and capital controls imposed at the height of the financial crisis.

Iceland is proceeding very cautiously to remove the controls as the economy recovers and had planned for them to be lifted by the end of 2013. But Europe's debt crisis and rising domestic inflation have put that timeframe in jeopardy and Finance Minister Oddny Hardardottir said in June the island still needs years to fully eliminate them.

Relative to much of Europe, however, Iceland's economy is surging ahead, despite the central bank having kept interest rates high to support the crown currency. (Anna Ringstrom and Simon Johnson; Editing by John Stonestreet)