Icelandic economy projected to grow by 0.1% this year according to national statistics office

The Icelandic National Statistics Office has published its winter economic forecast, projecting a modest growth of just 0.1% for this year. Following a contraction of 1.9% in the first half of the year, attributable to a downturn in the herring stock, the economy is expected to experience mild growth in the next two years, with predictions of 2.4% next year and 2.7% in 2026.

Private consumption is beginning to recover after a decrease earlier in the year; however, vehicle sales are expected to remain low due to high interest rates on car loans. The export sector is showing slight improvement despite challenges in herring fishing and restrictions in aluminum production. Exports of pharmaceuticals and farmed fish continue to grow, with an estimated 2.3 million tourists anticipated to visit the country next year, a slight increase from this year.

Inflation is projected to decline, standing at 5.1% currently and expected to average 3.8% next year and 2.7% by 2026. This forecast comes with a caveat concerning uncertainties related to the new road toll collection system that will be implemented at the start of next year. Should the forecasts hold true, it is likely that the key interest rates, currently at 9%, will decrease in tandem with easing inflation.

Unemployment is expected to rise to 4.1% next year from 3.7% this year. After a significant influx of people into the country in the years post-pandemic, growth in the population is anticipated to slow.

Despite increased household savings, households are also reportedly increasing their borrowing, with inflation-indexed mortgages regaining popularity. In August, these accounted for 58% of household mortgage loans, compared to a low of 44% in late 2022.