Eco­nom­ic fore­cast to 2027: Fair out­look yet any­thing may hap­pen 

Last fall, we issued an economic forecast titled „The economy catches its breath“ where we forecast a slight contraction in 2024 and around 2% growth in the following years. The temperature of the economy turned out to be higher than we thought, and instead of a contraction, growth measured 0.5% last year. The growth was driven in large part by increased investment, both in industry and residential housing.  

We now expect the economy to get off to a slow start and for growth to continue at a steady pace to the forecast horizon. We assume that capital formation will increase less in the coming years as compared to 2024, while private consumption on the other hand gathers momentum as the forecast period progresses and exports will be substantial. There are certainly some clouds on the horizon in the global economy and the domestic economy is highly dependent on foreign trade not experiencing major disruptions.  

The global economy in a straitjacket 

Currently, uncertainty in the forecast mainly stems from international trade and economic prospects in Iceland’s trading partner countries. The United States has imposed the most wide-reaching import tariffs seen since the early 20th century. It is still uncertain how other nations will respond and what Iceland's position might be. If the trade war escalates, economic growth could easily be lower than anticipated and when it comes to inflation, the outcome could go either way. The uncertainty has rarely been greater and only time can tell whether the forecast holds. 

Highlights from the forecast:

• The forecast assumes 1.4% growth this year and then gradually increased growth throughout the forecast period, by 2.1% in 2026 and 2.3% in 2027. We expect growth to be fairly broadly based, originating both in domestic consumption and investment, and also deriving from increased exports.  
• Inflation continues to dwindle during the forecast period, averaging 3.9% this year, 3.5% in 2026 and 3.2% in 2027, if our forecast holds.  
• In the near term, we expect the real policy rate to remain high and that the policy rate will not be lowered more than disinflation. As the forecast period progresses, the real policy rate can be expected to decrease and we expect a low point to be reached at 2% at the forecast horizon.  
• Despite high real interest rates having a dampening effect on consumption, we expect private consumption to grow throughout the period, by 1.7% this year, 2.0% next year and 2.5% in 2027.  
• This year we expect a similar number of travellers to visit Iceland as in 2024, or around 2.2 million. We expect the number to increase, but slowly in the coming years. Exports grow fairly steadily in coming years, not least as a result of growth in aquaculture and the pharmaceutical industry.  
• We expect the Icelandic króna (ISK) to retain current values at the end of this year and to depreciate in 2026 and 2027, not least due to a continued current account deficit. 
• The majority of the labour market has signed long-term agreements and the labour market has achieved a better balance than before. We forecast a 6.0% wage increase this year, 5.5% in 2026 and 5.6% in 2027. The purchasing power of wages grows all years, between 1.9-2.4%. 
• Unemployment can be expected to continue to grow slightly this year and to average 3.8%. We expect unemployment to remain fairly stable throughout the forecast period yet to decrease a bit in line with growing activity in the economy in the latter years of the period. We forecast 3.7% unemployment in 2026 and 3.5% in 2027.  
• Capital formation will show moderate growth this year, in contrast to high growth in 2024, both investment in residential housing and industry. Investment can basically be expected to maintain its momentum alongside improving funding terms. We expect price increases in the residential housing market to continue to decline, not least due to increased supply of housing. We forecast a 5.9% price increase for residential housing this year, 4.8% in 2026 and 6.4% in 2027.