Iceland unemployment forecast to peak at 5.5 percent

Unemployment in Iceland is expected to continue rising and reach 5.5 percent in the first half of next year, according to a forecast from Vinnumálastofnun, Iceland’s labour authority, reported by mbl.is.

Registered unemployment averaged 4.5 percent during the first seven months of this year, up from 3.9 percent during the same period last year. The labour market has cooled as the number of people in work has increased little or not at all.

Vinnumálastofnun expects annual unemployment to average about 4.5 percent in 2026, with seasonal fluctuations increasing slightly. Unemployment is forecast to rise beyond normal seasonal patterns over the next 12 months and peak at 5.5 percent during the first months of next year.

Unemployment at that level has not been recorded since August 2021, during the coronavirus pandemic. It reached 5.2 percent for two consecutive months at the beginning of 2022 before declining.

The agency said unemployment rose sharply after the collapse of Play airline in September last year. That increase does not appear to have been reversed in the nearly year since then, although other factors have also contributed.

Unemployment is usually lowest during the summer months. It stood at 4 percent in July, compared with 3.4 percent in July last year. Vinnumálastofnun forecasts that it could reach 4.4 percent in July next year.

The agency’s forecast refers to projections from the Central Bank of Iceland, which now expects economic growth of 1.4 percent this year, lower than in its previous forecasts. Inflation is expected to continue rising until the end of the year, while growth in purchasing power is expected to slow compared with recent years. Uncertainty in international trade is also expected to remain high, with signs of pressure in Iceland’s construction sector.

Vinnumálastofnun expects unemployment to rise in construction and other manufacturing industries over the next 12 months. It also expects unemployment in tourism to follow seasonal patterns and to be slightly higher than in recent years.

“We expect the largest increase in unemployment to be in construction, but we are also seeing signs of cooling in other sectors,” said Ásta Ásgeirsdóttir, head of the agency’s analysis department.

She said unemployment had also been rising in retail and services, a large sector, as well as in manufacturing outside construction. However, based on current conditions, the greatest cooling is expected in construction.

During the first half of this year, employment increased mainly in public administration, education, health and social services, and financial and insurance activities.

Vinnumálastofnun said signs of weakness in the labour market could also be seen in the number of people employed and the slowdown in the growth of the foreign workforce. Foreign workers have partly helped smooth labour market fluctuations by increasing when economic growth is strong, while their numbers stabilise or decline when growth slows.