Abrupt contraction in GDP at the beginning of the year

The failed capelin catch made a significant impact on the Q1/2024 national accounts. GDP shrank by 4% during the quarter, in the first year-on-year contraction Iceland has seen in three years. The outlook is for slow output growth in 2024, although the pace could pick up again in 2025 and 2026.

Statistics Iceland’s (SI) new national accounts data indicate that the adjustment of the economy in 2023 continued in Q1/2024. GDP contracted by 4% year-on-year in real terms in Q1, the first such contraction in SI’s figures since 2020, when the pandemic struck.

Exports a key driver of the contraction

The national accounts figures show that the contraction is due largely to developments in the export sector. As the chart indicates, negative developments in inventory changes weigh heaviest in the Q1 contraction. The SI press release states that this year’s failed capelin catch was the main driver of negative inventory changes. Fishing industry inventories grew by only ISK 3bn in Q1, as compared with the Q1/2023 increase of nearly ISK 39n, which stemmed largely from a strong capelin season.

In addition, exports of goods and services shrank by over 3% in real terms, while imports grew nearly 2%. The contraction in exports was due primarily to a nearly 4% downturn in services exports, while goods exports shrank nearly 1 percentage point over the same period. On the imports side, services imports grew by almost 7%, outweighing the scant 1% contraction in goods imports. According to SI’s figures, the contribution of net trade to output growth was negative by 1.4% during the period. In its press release, SI emphasises that the quality of the data used to calculate services trade could be in doubt, but that subsequent revisions in those data will not change the overall picture to any great degree.

Investment picks up, while private consumption holds steady

Investment grew by 2.4% YoY in Q1, showing more resilience than expected, although the figures accord well with imports of investment inputs year-to-date. SI’s press release states that the nearly YoY 16% jump in residential investment was the main driver of growth. At the same time, business investment was virtually flat and public investment contracted by nearly 6%, although SI emphasised that the latter figure was quite uncertain.

Private consumption was virtually unchanged in real terms in Q1, after two consecutive quarterly contractions. This is well in line with indicators such as payment card turnover and real wages. Households cut back on motor vehicle purchases and other consumption of durable goods but stepped up their spending on overseas travel, housing, and healthcare. Public consumption grew 1.2% YoY, reflecting households’ use of public services such as healthcare and education.

GDP growth set to be sluggish this year
After a surge in 2021-2022, GDP growth reversed course in 2023, plunging from 8.9% in Q1 to 0.6% in Q4. Domestic demand contracted year-on-year in H1 – for the first time since Q1/2021, when the pandemic turned the economy on its head. Exports shrank also in Q4/2023, and an abrupt contraction in imports was the main reason for the marginal growth that did indeed occur during the quarter. In all, GDP growth measured 4.1% in 2023.

In our newly published macroeconomic forecast, we project that GDP growth will measure 0.9% in 2024. This is quite weak in historical context, and the year actually marks a turning point in the business cycle, although a year-on-year contraction is probably not in the cards. Intrayear developments will probably mirror those in 2023, in that growth will be sluggish initially, and consumption and investment will gain steam later in the year.

For 2025, we forecast GDP growth to measure 2.3%. YoY output growth will be driven mainly by a faster rise in consumption and investment, supported by renewed growth in goods exports. In 2026, the outlook is for 2.6% GDP growth, with growing domestic demand outweighing weaker export growth. Stronger growth in investment and private consumption further ahead will stem not least from firms’ greater capacity for investment, with falling interest rates and robust real wage growth accompanying declining inflation.

We now project considerably slower growth over the forecast horizon than we did in January, owing not least to weaker growth in tourism and private consumption than we expected previously. This reflects, among other things, the effects of stronger demand pressures in the economy in the recent term, as well as weaker real wage growth and higher interest rates than in the previous forecast.

The newly published figures from SI align well with our forecast for 2024 as a whole, although they represent the first set of preliminary numbers and will be revised later this year. The big picture is that the economy is still cooling after its short but strong upswing.


Jón Bjarki Bentsson

Chief economist