Iceland predicts modest economic growth with inflation decline and rising unemployment

According to the latest economic forecast, Iceland is expected to see a modest growth rate of only 0.1% this year, with a more optimistic projection of 1.9% growth next year. The National Statistics Office of Iceland has revised its predictions following a period of economic stagnation this year, attributed partly to a decline in the capelin fish stock.

Significant recovery in private consumption has been noted after the downturn earlier this year. However, automobile sales are expected to remain low due to high interest rates on car loans. Meanwhile, the export sector is showing signs of recovery despite ongoing challenges in fishery and aluminum production. The pharmaceutical and aquaculture sectors continue to grow, with an anticipated influx of around 2.3 million tourists visiting Iceland next year, slightly more than this year.

Inflation is projected to decline, currently sitting at 5.1%. The forecast predicts an average inflation rate of 3.8% next year, dropping further to 2.7% by 2026. Should these predictions hold true, interest rates, currently at 9%, are expected to decrease alongside falling inflation rates.

Unemployment is forecasted to rise slightly, increasing from 3.7% this year to 4.1% next year, following significant immigration flows that occurred in the post-pandemic period. Concurrently, household savings have reached their highest levels since late 2020, although borrowing has increased as inflation-linked loans have become more prevalent, comprising 58% of mortgage loans by August, up from a low of 44% in the latter half of 2022.