According to Statistics Iceland’s (SI) newly published preliminary figures, GDP grew by 1.3% in 2025, in line with our macroeconomic forecast, published in late January. Positive growth in 2025 follows on from a contraction of 1.3% in 2024. As the chart shows, developments fluctuated within the year, with robust growth in Q1 and Q3 and marginal contractions in Q2 and Q4.
2025: decent GDP growth in a challenging environment
Iceland’s year-2025 GDP growth rate of 1.3% was driven largely by strong private consumption but impeded by headwinds in the export sector and surging imports. The outlook is for growth to be subdued in 2026 and then gain steam in the two years to follow.
Private consumption growing at a good clip
Strong growth in private consumption was the main driver of GDP growth in 2025. In real terms, private consumption growth measured 4.3% overall, its sturdiest since 2022. What is noteworthy is that the pace picked up over the course of the year, from 3% in Q1 to 5.5% in Q4. Households seem largely to have shrugged off the darkening economic outlook, the deterioration in consumer expectations, and the worsening inflation outlook late in the year.
households’ car purchases. SI points out that the changes in excise taxes and electric car subsidies that went into effect at the turn of the year gave consumers an incentive to make their vehicle purchases before 2025 came to a close. In addition, Icelanders’ well-known zest for travel was clearly in evidence in the final months of 2025 – and throughout the year, actually. During the year, households benefited both from having accumulated significant savings during the years beforehand and from handsome real wage gains, which generally outweighed the modest rise in unemployment.
Public consumption – i.e., Icelanders’ collective consumption of public services such as education and healthcare services – grew by 1.2% in 2025. In ISK terms, however, it grew by nearly 9%, but SI estimates that 7.5 percentage points were due to price level increases. SI points out that a more detailed analysis of these figures will be published on 12 March and that the numbers will also change upon revision in August. The Central Bank (CBI) has had doubts about the interaction between price and volume in this item, and it will be interesting to see what the August revision reveals.
Data centre development a major contributor to investment growth
Investment growth in Iceland was broadly acceptable in 2025. Overall, gross fixed capital formation increased in 2025 by 4.0% in volume terms, the slowest growth rate since the pandemic surged at the start of the decade, and well below the ten-year average of just over 8%. Although private consumption picked up during the year, investment did the opposite, flipping from 17% growth in Q1 to a contraction of 12.5% in Q4.
Growth was confined entirely to business investment, but it should be noted that various Government-owned firms – such as ISAVIA and the energy companies – are classified as business investment rather than public investment. Development in the data centre sector strongly affected total investment in each quarter of the year. SI states as follows in today’s press release:
“Imports of various types of computer components for data centers increased significantly in the fourth quarter of 2024 and continued to do so in the first and second quarters of 2025. However, in the third quarter the volume of these imports declined considerably, and they were relatively low in the fourth quarter of 2025. This has to a significant extent influenced the results of each quarter in terms of capital formation.”
Actually, a large portion of this bump in investment stems from a single data centre operated in Eyjafjörður by atNorth, which, as we have noted previously, accounts for several percentage points of GDP. In addition, car rental agencies and other companies hoarded motor vehicles as the year advanced, in anticipation of the year-end hike in excise taxes. SI estimates that investment in vehicles grew 72% between 2024 and 2025, although it contracted between 2023 and 2025.
Exports soldier on despite headwinds
Growth in domestic demand – the sum of consumption, investment, and inventory changes – measured 3.9% in 2025; i.e., three times the GDP growth rate. The difference lies in a substantially unfavourable contribution from net trade, as imports grew by 7.2% in volume terms and exports by only 1.0%.
Fortunately, the lion’s share of import growth was associated with the above-mentioned boom in investment, not least in export sectors such as data centres and car rentals. Icelanders’ overseas travel also helped buoy up imports in 2025.
On the exports side, the year turned out well for tourism, despite a bleak beginning. Total services exports grew by nearly 5% in 2025, fuelled mainly by strong growth in exports of miscellaneous specialised services such as telecommunications, IT, and financial services. On the other hand, goods exports shrank in real terms by 1% during the year, owing mainly to a Q4 contraction of more than 13%, caused by a series of shocks such as the closure of the Bakki silicon plant, an equipment breakdown at the Grundartangi aluminium smelter, and production cutbacks due to market conditions at Elkem’s Grundartangi plant.
Modest growth in the offing for 2026
Concurrent with its publication of the most recent national accounts for 2025, SI revised figures for previous years. This revision was more moderate, however, than some that have been published in the recent past. To encapsulate, year-2024 GDP is now estimated to have contracted by 1.3% instead of the previous 1.2%, year-2023 GDP grew by 5.0% instead of the previous 5.1%, and year-2022 GDP growth has been revised upwards to 8.9% from the earlier estimate of 8.8%.
As before, GDP growth for 2025 was in line with our end-January forecast, and the big picture is broadly unchanged as regards the composition of growth, even though a few individual items developed differently than we had expected.
According to our macroeconomic forecast, GDP growth will be tepid this year, owing primarily to various export shocks and the impact of high real interest rates on domestic demand. Growth is projected at 0.6% in 2026, and it would take little to push it into negative territory. According to the forecast, GDP growth will gather pace in 2027 and 2028, supported by a rebound in exports and more accommodative interest rates. Investment will then pick up, and private consumption growth will be stronger than in 2026.
Prospects for exports have brightened somewhat since we published our forecast. The contraction in tourism could prove slightly smaller than we projected, the capelin fishing season will probably contribute as much as 0.4 percentage points to output growth, and the equipment malfunction at the Grundartangi smelter looks set to be resolved somewhat more quickly than we had feared. On the other hand, more persistent inflation and a longer wait for interest rate cuts could curtail investment and private consumption more than we envisioned. On the whole, the outlook for 2026 is broadly unchanged, although uncertainty about GDP growth is probably tilted slightly to the upside.
