Total investment grew by 18% in Q1/2025. Business and residential investment increased markedly and public investment grew modestly as well. SI mentions, however, that public investment figures are highly uncertain. The main driver overall was a nearly 20% surge in business investment, which SI reports was due mainly to computer equipment imports for data centres. Quarterly investment figures are always prone to significant fluctuations, but overall, business investment has been gaining steadily since spring 2021.

In addition, residential investment was up 22% year-on-year in Q1. It has been on the rise for several quarters, after a sustained contraction from mid-2021 through autumn 2023. This is a positive trend, given the strength of underlying demand for housing, even though tight monetary policy and stringent mortgage lending terms have eased demand pressures recently.

Private consumption on the rise

Private consumption has gained steam recently, after a brief contraction in H2/2023. In real terms, it grew by 2.3% YoY in Q1/2025, its strongest in more than two years. But this robust growth rate does not come entirely as a surprise, given that indicators such as payment card turnover and new motor vehicle registrations suggest that households have been spending more freely after clutching their wallets fairly tightly from spring 2023 until mid-2024.

According to SI’s press release, early 2025 was characterised by households’ consumer durables purchases and overseas travel-related spending. Other key components of private consumption grew more modestly, however. It is worth noting as well that real wages grew 3% YoY during the quarter. Private consumption can be expected to accelerate further in coming quarters, as unemployment is still moderate, accumulated savings sizeable, real wages on the rise, and household sentiment growing more upbeat after dipping briefly in April.

Negative contribution from net trade

Exports rebounded in Q1, after an uninterrupted decline lasting five quarters. The turnaround was driven mainly by a strong uptick in services exports after a sluggish 2024. In all, services exports grew by more than 7%, while goods exports grew 2.5% YoY. This is due largely to base effects, as services exports contracted by nearly 11% in Q1/2024, while goods exports grew almost 6% over the same period.

Interestingly, tourism-related services exports increased nearly 5% in ISK terms, even though the number of foreign nationals departing Iceland via Keflavík Airport dropped almost 9% YoY, according to data from the Icelandic Tourist Board. The departure figures are somewhat in doubt, as are data on foreign nationals’ overnight stays, as has been discussed frequently on the news website ff7. Developments in services revenues from tourists imply that activity in the sector was stronger early this year than Keflavík Airport departure numbers would indicate.

And while exports grew apace in Q1, they were vastly outpaced by imports. This is due not least to the surge in importation of investment goods, mainly in connection with the above-mentioned data centre projects. It is important to remember that the data centre projects generate very little foreign currency flows because they are financed abroad.

On the whole, then, the contribution of net trade to output growth was negative in Q1, as it has been since the start of 2024.

Wide-ranging revision of previous years’ national accounts data

Concurrent with its publication of the Q1/2025 national accounts, SI released revised national accounts figures dating back to 1995. A number of items changed markedly as a result. For instance, SI now estimates that GDP contracted by 0.7% in real terms in 2024, whereas the first preliminary figures indicated a growth rate of 0.5%. In addition, GDP growth for 2022 and 2023 was revised slightly downwards, while the 2021 growth rate is now estimated to be quite a bit stronger and the 2020 contraction smaller than previous numbers suggested.

This revision affects the interpretation of the most recent figures. For example, the 2.6% YoY output growth estimate for Q1/2025 represents growth from a somewhat lower level in 2024 than previously thought. It can therefore be said that both economic activity and demand pressures are less pronounced at present than the figures might indicate at first glance. It is also worth noting that the Central Bank (CBI) projected Q1 output growth at a mere 0.1% in its most recent Monetary Bulletin. That forecast was based on older data, of course, and is therefore more accurate than it might have appeared otherwise. Even so, it seems to us that the CBI was fairly conservative in its estimate of growth in early 2025.

In our newly published macroeconomic forecast, we review the GDP growth outlook for the coming term. It goes without saying, though, that our GDP growth forecast for 2025 as a whole is based SI’s previous figures, and the actual growth rate could end up stronger as a result.

We project output growth at 1.9% in 2025. Rising private consumption will be the main driver, with support from robust investment growth and moderate export growth.

The outlook is for growth to gain steam in 2026 and 2027. We project GDP growth at 2.3% in 2026 and 2.9% in 2027. We forecast that private consumption and exports will fuel growth in both years, with the difference between them stemming mainly from investment, which we expect to shrink in 2026 and rebound in 2027.

Although the forecast is relatively favourable, various uncertainties could change the outlook in the quarters ahead. Among them is the trade war launched by the US early this year, with no end in sight. The potential impact of the trade war is discussed in an appendix to the macroeconomic forecast, but our baseline scenario assumes that tariffs will not rise much more than they already have. Furthermore, the wars in Eastern Europe and the Middle East continue, and it is impossible to tell whether the conflicts will escalate in the near future.

As before, domestic uncertainties include developments in the seismic activity on Reykjanes peninsula. Delays in energy procurement later in the forecast horizon could impede investment growth further ahead. The medium-term supply-demand balance in the housing market is uncertain as well. Finally, population growth could be a major factor in whether housing market tensions persist, although in our forecast we assume that net inward migration will be much slower than in recent years.