Iceland’s GDP is projected to increase by 3.6% this year. Growth dynamics are changing as GDP growth will be driven by net exports while growth in domestic demand is expected to ease, following robust growth for the last two years. In 2024 GDP is forecast to grow by 2.1% as export growth eases. Risks to the outlook have increased, especially uncertainty regarding a possible volcanic eruption on the Reykjanes peninsula. A state of emergency has been declared and a local town has been evacuated which is at risk along with critical infrastructure that can affect the entire peninsula.
Private consumption growth is expected to decelerate, following a notable expansion in the past two years. Private consumption is projected to rise by 1.7% this year and by 1.9% next year, influenced mainly by an increase in working hours. Per capita private consumption is expected to contract by 1.8% this year, before stabilizing next year. Over the forecast period, private consumption is anticipated to grow as inflation rates decline. Public consumption is expected to grow by 1.8% this year and 1.6% next year but will slow down in the following years.
There are indications that growth in business investment is slowing down as financial conditions tighten, imports of capital goods cool and growth in VAT turnover in construction slows down. Business investment is set to increase by 1.8% this year and 1.6% in 2024. Housing investment is projected to contract by 1.3% this year and 4.2% next year. This year public sector investment is expected to decline by 8.1% due largely to contraction in the investment of municipalities. A turnaround is projected next year as public sector investment is expected to grow by 0.5%.
Export growth is waning after a strong growth in the past two years, which can mainly be attributed to the tourist sector. It is estimated that exports will increase by approximately 6% this year, tapering off to nearly 4% next year. As economic activity eases, the momentum in import growth is also moderating, with an anticipated increase of approximately 1.6% in the present year and a projected 2% growth in the ensuing year. The positive contribution of foreign trade to economic growth underpins the surplus that is expected to be in the balance of trade this year, and the surplus is expected to grow in the coming years.
Inflation is set to ease gradually in the near term. The consumer price index is forecast to increase by 8.7% this year. Inflation is set to decline as the economy cools and cost pressures from inflation abroad ease. Inflation is set to decline to 5.6% in 2024 and reach 3.6% in 2025 and edge closer to the Central Bank’s 2.5% inflation target in the following year.
Unemployment is expected to average 3.5% this year. In the forthcoming year, unemployment is anticipated to increase, reaching an average of 4%. This increase aligns with decelerating GDP growth. In the first nine months of the year total working hours increased by 5.2% and people of working age increased by 3.8%. The purchasing power measured by the wage index is expected to increase by 0.9% this year. With most collective bargaining agreements set to expire early next year, there is uncertainty regarding new negotiations. However, it is projected that the wage index's purchasing power will increase by about 1.1% next year.
Households have reduced their borrowing this year while increasingly seeking inflation-indexed financing. Private sector debt is historically low compared with GDP and income, and the default rate of loans at depository institutions rank among the lowest.
The last economic forecast was published on the 30th of June 2023. The next forecast is scheduled for March 2024.
Economic forecast — Statistical Series