Economic growth slowed down in the second half of last year and in the first quarter of this year the gross domestic product decreased by 4% from last year. The economy is projected to grow by 0.9% this year, boosted by domestic demand. In 2025, GDP growth is expected to reach 2.6%, driven by private consumption, investment and improving net exports. Broad based growth is anticipated in 2026 with GDP growing by 2,7%.
Private consumption is expected to increase by 0.9% this year. Private consumption was stronger in the first quarter of the year than indicators suggested. New collective wage agreements and lower inflation will support private consumption as the year progresses. Next year, private consumption is expected to increase by 2.4%. Real wages are expected to rise more next year due to lower inflation along with increasing disposable income. Public consumption increased by 1.2% in the first quarter of the year. Growth is expected to reach 1.6% this year but will ease in the following years.
Business investment is set to increase moderately in the coming months. High policy rates are cooling the economy and financing conditions for businesses are still tight. This year, business investment is expected to grow by 1.9%. Conditions will improve in the following years, pushing up investment. In 2025, business investment is forecast to increase by 2.5% and by 3.5% in 2026. Housing investment increased by 15.7% in the first quarter of the year but is projected to increase by 2.9% for the year.
Continued growth is projected in the coming years, 4.9% in 2025 and 6.4% in 2026. Public sector investment decreased by 5.8% from the previous year in the first quarter. Public investment is set to decrease by 3.9% this year but will pick up next year and grow by 2.6%.
Net exports contributed negatively to GDP growth in the first quarter. Exports decreased by 3.3% year-on-year in the first quarter, driven by a decrease in exports of services. Imports increased by 1.6% year-on-year in the first quarter, primarily due to increased imports of services. The growth in exports of services is expected to slow down, while exports of goods are anticipated to increase in the latter part of the year. Exports are forecast to increase by 1.3% this year and by 4.2% next year.
Inflation has subsided slowly during the year, in part due to pressures on the housing market. On the other hand, high policy rates are cooling the economy, the exchange rate of the króna has been stable, and the recent long-term collective wage agreements should contribute to declining inflation in the coming years. The consumer price index is set to increase by 6% on average this year. In 2025, inflation is expected to average 3.9% and 2.7% in 2026.
With subdued economic activity this year, unemployment is expected to increase and reach 4.2% on average compared to 3.4% in 2023. Total working hours increased by 3.9% in the first four months of the year compared to 5% in 2023. High population growth has characterized the labour market in recent years, but the number of people of working age increased by 3.7% in 2023 and by 3.1 % between years in the first four months of the year. Population growth is expected to slow down in the coming years.
Uncertainty about wage increases in the coming years has mostly been eliminated by the signing of new collective wage agreements in the private market. It is assumed that contracts in the public market will be comparable and that the wage index based on constant prices will increase by 0.6% this year and 1.7% in 2025.
Borrowings by households increased in the first four months of the year. The increase is mainly due to new indexed loans and the share of non-indexed loans to households is decreasing. The foreign asset position of the national economy has improved and was positive by 41.1% of gross domestic product at the end of the first quarter.
The last economic forecast was published on the 16th of April 2024. The next forecast is scheduled for November 2024.
Economic forecast— Statistical Series