A new issue of Statistical Series presenting an economic forecast for the economy of Iceland is now available. The forecast covers the years 2023 to 2028.
Economic growth accelerated to 6.4% last year driven by an increase in private consumption and a robust recovery in exports. For this year, GDP is projected to grow by 3.8%. Growth in domestic demand is expected to ease but the contribution of foreign trade to economic growth will be positive.
Robust growth in private consumption, which increased by 7% in 2021 and 8.6% in 2022, is set to slow down this year and is forecast to grow by 1.9%. Tight labour market conditions support private consumption, but high inflation and rising interest rates reduce purchasing power. Public consumption grew by 1.6% last year. Public consumption growth is expected to be 2% this year and 1.7% next year.
Business investment is set for slower growth in this year after a significant increase in the last two years. Business investment is forecast to increase by 3.4% this year as growth is expected to be broad-based. In 2024, business investment is expected to increase by 5.4%. Housing investment decreased by 6.3% last year for the second year in a row. The number of people employed in the construction industry increased by over 11% last year to its highest level since 2008. Growth in housing investment is projected to exceed 14% this year and around 8% next year. Public sector investment decreased by 0.9% last year. This year public sector investment is expected to decline by 3.5% due to postponement of investment projects. A turnaround is projected next year as public sector investment is expected to grow by 2.1%.
Exports have grown rapidly in the past two years due to recovery in the tourist sector. Despite strong growth, the contribution of foreign trade to economic growth last year proved to be negative due to the high growth of imports, which is attributed, among other things, to imported services and the imports of commodities. It is estimated that exports will grow by 7.8% this year and imports by 5.1%. For the past three years the balance of trade has been negative and is projected to remain so this year and in 2024.
Inflation outlook has deteriorated. High global inflation, exchange rate depreciation at the end of the year and a tight labour market have increased domestic inflationary pressure. This year, inflation is forecast to increase by 8.2% from last year. Next year, inflation is expected to ease, reaching 4.6%, due to lower inflation abroad and a cooling economy.
Last year the unemployment rate averaged 3.8%. At the same time, there was a large population increase, but the number of people of working age increased by 2.7%. Employment participation also increased and was 80.1% compared to 78.8% in 2021. The labour market is expected to remain robust this year and unemployment is forecast to average 3.8%, similar to last year.
Total household debt is low compared with disposable income, assets and GDP. Total debt of business enterprises has increased in recent months but is historically low as a percentage of GDP. There has been some turmoil in international financial markets due to the operational difficulties of foreign commercial banks, but the combined capital ratio of domestic systemically important banks is 2.3-4 percentage points above the Central Bank of Iceland’s minimum requirements. Iceland's international investment position at the end of 2022 was net positive by 24.2% of GDP.
The last economic forecast was published on the 11th of November 2022. The next forecast is scheduled for June 2023.
Economic forecast — Statistical Series