According to Íslandsbanki’s new macroeconomic forecast, GDP growth is expected to be broadly flat year-on-year in 2026, while the composition of growth will differ between years. This year, external trade accounts for a large share of growth, with exports growing marginally and imports contracting. Private consumption is expected to grow modestly during the year. According to the forecast, GDP growth will pick up again in 2027 and 2028, driven by stronger private consumption, a turnaround in investment, and more rapid export growth.
Macroeconomic forecast: Choppy seas but a firmly ballasted ship
Íslandsbanki Research issues macroeconomic forecast for 2026-2028
The inflation outlook has changed with the onset of hostilities in the Persian Gulf. Imported inflation is likely to rise in the near future, and inflation will probably be more persistent than previously projected. According to the forecast, the review clause in wage agreements will be triggered this autumn, but it is assumed that the contracting parties will negotiate a slightly larger pay rise for 2027 while leaving the wage agreements intact in other respects.
The Central Bank’s (CBI) monetary easing phase will be delayed because of persistent inflation and high inflation expectations. Interest rates have been raised by 0.5 percentage points in 2026 to date, and the forecast assumes a further increase in Q3. After that, we expect the policy rate to remain unchanged until Q1/2027, whereupon the CBI’s Monetary Policy Committee (MPC) will embark on an easing phase that will last well into 2028.
Highlights
GDP growth – Brief setbacks in exports and high real interest rates impede near-term GDP growth. Growth is forecast at 1.3% in 2026, 2.1% in 2027, and 2.5% in 2028
External trade – Current account deficit set to be smaller than in the recent past. The deficit will measure 1.9% this year and around 1.5% per year in 2027-2028
Labour market – Slack in the labour market; sluggish real wage growth. Wages are set to rise 6.2% in 2026, 5.7% in 2027, and 4.9% in 2028
Inflation – Imported inflation likely to resurface, obstructing the disinflation process in the near term. Inflation will yield over time, however. It is forecast to average 5.1% in 2026, 4.3% in 2027, and 3.8% in 2028
Interest rates – The Central Bank is in a tight spot. A policy rate hike is likely in Q3, followed by gradual unwinding starting in Q1/2027
The ISK – A depreciation grows steadily more likely over the forecast period. The ISK is expected to be about 5% weaker at the end of the forecast horizon
