Iceland faces rising unemployment as growth slows

Iceland’s economy is set for sluggish growth and higher unemployment in the coming years, according to a new 2026–2028 forecast from ASÍ, reported by mbl.is.

Gross domestic product is forecast to grow by 1.9% this year and 1.1% next year, before picking up slightly in 2028. The forecast says growth has been modest by historical standards and is expected to remain so.

Domestic demand is expected to weaken during the forecast period, particularly investment. Total investment is forecast to fall by 6.7% next year, mainly because of lower business investment and a sharp reversal in housing investment.

Recent indicators suggest the housing market is cooling quickly, the forecast says. New construction starts recorded by HMS between March and September 2026 were at their lowest level since 2022. The number of completed, unsold homes stood at 1,855 in September, up from 1,409 in March.

Housing investment is forecast to contract by 6.7% this year and 9.0% next year, making it the biggest drag on economic growth in 2027. The forecast expects real house prices to fall by 2.8% this year and 2.4% next year.

Unemployment is projected to rise from 4.3% to 5.8% this year, equivalent to nearly 14,000 people being out of work. The recovery is expected to be slow, with unemployment still around 4.8% in 2028 despite output growth over the same period.

ASÍ said uncertainty remains over economic and price developments, partly because of international events and the risk that the economy will cool faster than forecast. An agreement to extend collective labour contracts and targeted government measures are expected to reduce uncertainty over prices and support greater price stability.

Inflation is forecast to remain well above the Central Bank’s target in the short term, averaging about 5.5% in 2026. The forecast projects an average of 4% in 2027, easing to 2.5% in 2028. A scenario in which oil prices rise by 20% would add 0.3 percentage points to inflation in 2027.