Macroeconomic forecast 2021-2024: Robust economic recovery has begun
Around 89% of Icelanders, 12 years and older, are now fully vaccinated against Covid-19. The rate of new infections is still rather high yet serious illness is rare. Developments in Iceland’s main trading partner countries are similar, with vaccination rates a little lower than here. Despite a set-back to expectations of achieving herd immunity through vaccination caused by the delta variant, the economic outlook for 2021 has improved slightly. This year to date, foreign travellers to Iceland have increased rather less than we forecast in May. At the same time, average spending per tourist has been considerably higher. Development of export income from the travel sector has been more positive than we expected. Private consumption growth has also been more robust than we forecast in spring and unemployment levels have fallen more quickly. As a result, we expect 5.1% economic growth in 2021 following a 6.5% contraction in 2020. The outlook is for even more powerful growth in 2022, or around 5.5%, followed by more conservative growth in the latter part of the forecast period. Inflation has proved to be more persistent than indicated in May. This is primarily due to tension in the housing market, where price increases have been both higher and more persistent than we anticipated. We expect inflation to peak soon and to start to subside in early in 2022. The outlook is for a slow and steady decline in inflation as the year progresses and the international impact of the pandemic on such things as commodities prices and freight cost recedes. We do not expect inflation to hit the Central Bank’s target until mid-2023. Robust economic growth and persistent inflation will press policy rate hikes in careful yet decisive steps over the next 1-2 years and we expect the CB’s key interest rate to rise over 4% in the latter half of 2023.