Economic activity has slowed recently. The economy grew by 4.1% last year. Gross domestic product is forecast to increase by 1.5% this year, driven by private consumption, foreign trade and public consumption. Growth is expected to pick up in 2025 and reach 3.0% when domestic demand strengthens.

Private consumption is expected to increase by 0.9% this year. Credit card transactions and new vehicle registrations indicate that private consumption will be subdued in the first quarter of the year. Lower inflation and wage increases will support private consumption growth as the year progresses. The number of people of working age are presumed to continue increasing this year, albeit at a slower pace, and that private consumption per capita will decrease by 1.2%. Next year, private consumption is set to grow by 3%, underpinned by increasing disposable income, attributed in part to declining inflation and lower interest rates. Public consumption increased by 2.2% last year. Its share of GDP increased slightly and reached 25.7%. Public consumption is expected to grow by 1.4% this year, with growth decreasing in the following years. This year the share of public consumption in GDP is anticipated to be 26.3%.

The outlook for business investment has soured. Financial conditions tightened rapidly last year and their effects are being felt. This year, business investment is forecast to increase by 1.3%. Business investment is projected to increase by 3% in 2025 and by 3.7% in 2026, as financial conditions improve. A turnaround took place in residential investment in the second half of 2023, after a quarterly decline from the first quarter of 2021. Residential investment is forecasted to grow by 2.1% this year and robust growth in 2025. Public sector investment decreased by 6.1% last year. This year, public sector investment is set to decline by 4%, but a reversal to growth is presumed in coming years.

Last year, the balance of goods and services improved year-on-year, with the deficit amounting to about 0.1% of GDP. A surplus of around 0.4% of GDP is anticipated in 2024. Growth in exports slowed last year after the tourism sector had reached pre-pandemic levels, registering an increase of about 4.8%. Imports contracted by 1.4% last year, following significant growth in previous years. Exports are forecasted to grow by 3% in 2024, though the impact of ongoing natural disasters adds uncertainty. In the coming years, annual growth of 2.5-3.2% is projected. Imports are assumed to grow in line with domestic economic activity, estimated at 1.8% this year and averaging 2.2% in the following years.

Inflation is set to decelerate in 2024. Inflation abroad has subsided rapidly and as domestic economic activity slows, inflationary pressures will decrease. Additionally, recently negotiated long term wage agreements for most of the private market create conditions for further slowdown in inflation. The Consumer price index is forecast to increase by 5.2% on average this year and by 3.2% in 2025. In 2026, inflation is expected to reach 2.7% on average, but is estimated to be close to the 2.5% inflation target of the Central Bank of Iceland in the following years.

Unemployment averaged 3.4% last year. As the economy slows down, unemployment is forecast to increase this year, averaging 4,2%. Total working hours increased by 5% last year, but the increase is expected to be significantly slower this year. Uncertainty regarding wage increases for the coming years has now been largely resolved, with most of the private market signing a four-year wage agreement in March 2024. Subsequent agreements in both the general and public sectors are assumed to be comparable. The wage index is projected to increase by 1.5% in real terms in 2024 and by 1.7% next year.

The debt position of households is economically sound and the ratio of household debt to GDP has not been lower since 2018. Household equity has not been higher as a percentage of GDP since data collection began. The net foreign asset position at the end of last year amounted to almost 38% of GDP.

The last economic forecast was published on 17 November 2023. The next forecast is scheduled for June 2024.

Economic forecast— Statistical Series


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