Following a contraction of 0.7% in real GDP in 2024, the Icelandic economy is projected to return to growth in 2025, with output expected to expand by 2.2%. This recovery is expected to be primarily driven by strong domestic demand. In 2026, GDP growth is forecast to strengthen to 2.5%, largely reflecting an improvement in external trade conditions and a continued rise in private consumption. By 2027, growth is projected to reach 2.8%, supported by a broader base of economic activity across sectors.
Private consumption is expected to increase by 3.1% in 2025, following growth in the first quarter and supported by favorable indicators for continued expansion throughout the year. Key drivers for the forecast period include strong household balance sheets, rising real wages, and lower interest rates. Public consumption is projected to grow by 1.6% in 2025, with a more moderate pace of 1.1% anticipated in 2026.
Investment is forecast to rise by 5% in 2025, with much of the increase attributed to investments in data centers. However, a contraction of 4.5% is expected in 2026 due to base effects. Other forms of investment are projected to grow modestly, supported by improving financing conditions and the acceleration of energy-related infrastructure projects.
Exports are projected to grow by 2.9% in 2025 and by 2.5% in 2026. Services exports related to inbound tourism are expected to remain broadly in line with the previous year. The trade balance in goods and services is forecast to register a deficit of 1.4% of GDP in 2025, before returning to surplus in 2026.
Inflation is expected to continue its downward trajectory over the forecast horizon. A tight monetary policy stance, appreciation of the króna, and multi-year wage agreements are expected to support an improving inflation outlook, although persistent economic momentum may temper the pace of improvement. Consumer price inflation is projected to average 3.8% in 2025 and gradually converge toward the inflation target by 2027.
Real wages are expected to rise by 2,8% in 2025. Labour market pressures have eased, with a slowdown in population growth and reduced labour demand suggesting a gradual return to equilibrium following a period of significant tightness.
Risks to the outlook have increased, particularly due to heightened geopolitical tensions in the Middle East and evolving trade policy shifts.
The last economic forecast was published on 25 March. The next forecast is scheduled for November 2025.
Economic forecast — Statistical Series