Arion Bank forecasts weaker growth and rising unemployment for Iceland’s economy

The latest economic forecast from Arion Bank predicts weaker growth for the coming year, with rising unemployment anticipated. The bank’s chief economist warns of a difficult winter ahead for many.

Arion Bank released its three-year economic forecast, suggesting that while economic growth is expected to increase slightly in the upcoming years, it will fall below earlier projections. Unemployment is predicted to rise, and inflation is expected to remain persistent, potentially dropping to 3.1% by the end of the forecast period while interest rates remain close to 6%. The growth of the tourism sector is projected to slow down, property values may decrease in real terms, and many households are likely to face deteriorating financial situations.

The chief economist at Arion Bank stated that the upcoming winter may be quite tough, with per capita private consumption continuing to contract. This situation will pose significant challenges for sectors like tourism, given recent developments. The bank anticipates the next 12 to 18 months to be particularly challenging, testing the resilience of households.

Erna Björg Sverrisdóttir indicated that while it seems the economy may need to tighten its purse strings, it’s also crucial to acknowledge the context of the current situation. Although per capita private consumption has been declining over the past two years, the consumption level remains relatively high.

Despite the bleak short-term outlook, she expressed confidence that improvements could occur as the forecast period progresses. Recently observed trends in tourism and household conditions have deteriorated faster than previously expected; however, there is optimism regarding innovation and ambition within the economy for the long term.