Data centres make a heavy footprint

Data centre development casts a unique light on the national accounts at present. Gross capital formation grew by 5.7% during the quarter and business investment by 10.1%. The main driver there is in record-smashing investment in the data centre industry, which, according to SI’s press release, blew past its own record, set in the same period in 2025.

This affects more national accounts items than investment alone. Data centre development calls for large-scale importation of hardware, data storage facilities, energy systems, and other specialised equipment. SI points out explicitly that the 1.4% real increase in goods imports during the quarter is due mainly to data centre-related activities. In other words, the same development projects boost investment and imports but have a far more modest net impact on the GDP growth rate. Because of this, data centre development has a tendency to exacerbate quarter-to-quarter swings in the national accounts, first with a surge in investment and imports and then with an increase in services exports once operations are up and running. Actually, data centre activities have already generated growing export revenues, as we have discussed recently, and will continue to affect the outcome in the quarters ahead.

If we look past the so-called data centre impact, developments in the Icelandic economy are far more moderate, at least in terms of investment. Residential investment contracted by 3.7% and public investment by 5.0% in Q2. The upsurge in investment in the quarterly figures is therefore limited mainly to a few very large projects.

Because quarterly investment data are particularly volatile in Iceland, it is more instructive to examine H1 as a whole. In fact, zooming out in this way is a useful approach to all of SI’s newly published numbers. For example, total investment shrank by 2% in H1, meaning that the scant 1% growth in business investment was counterbalanced by a more than8% downturn in residential investment and a nearly 7% contraction in public investment.

Exported volumes are down, but prices are up

As is noted above, the goods account showed a sizeable deficit (at constant prices) in Q2. It stemmed predominantly from a nearly 14% YoY contraction in the volume of exported goods. In ISK terms, however, goods exports grew by over 2%, buoyed by steep hikes in the price of aluminium and marine products. This is part of the reason why the ISK has been so strong recently, despite an unfavourable trade balance.

Services trade continues to support GDP growth, but not quite enough to erase the negative effects of goods trade. The contribution of services trade to output growth was positive by 0.2 percentage points in Q2, while the contribution from goods trade was negative by 2.9 percentage points. Actually, both sides of the services account showed a contraction, but the 2% drop in services imports outweighed the 1% contraction on the exports side.

Private consumption growth still losing pace

Private consumption grew by only 0.8% YoY in Q2, the second quarter in a row to see a contraction in household spending after brisk growth in 2025. Purchases of motor vehicles and non-durable consumer goods shrank, and services consumption is now growing more slowly than in the recent term. Furthermore, Icelanders’ spending abroad grew only slightly, as did the housing segment of consumption spending.

This blends well into the scenario sketched out by other economic indicators in recent months. Growth in payment card turnover has lost steam, real wages are rising more slowly than before, and the high real interest rate still appears to have a dampening effect on household spending. In addition, the Gallup Consumer Confidence Index (CCI) shows that consumers have been exceedingly downbeat about the economy and labour market recently, with index values at their lowest since the pandemic – and before then, right after the 2008 financial crisis. On the plus side, consumption is still growing incrementally, and households enjoy a generally robust financial position and ample savings.

Labour market figures from the national accounts support the contention that the economy has slowed and demand pressures have subsided. The number of employed persons rose by 0.9% YoY, but total hours worked declined by the same amount. In seasonally adjusted terms, hours worked were down 1.3% relative to Q1.

All of this complements other signs of a cooling labour market. This is important for the inflation outlook, as reduced labour market pressures should gradually ease domestic inflationary pressures, all else being equal.

Data revision affects the business cycle picture

In our view, SI’s revision of the national accounts for 2023-2025 is almost as interesting as the new quarterly data are. Among other things, the revision is based on more complete data on payment card use, updated figures from small and medium-sized enterprises, and new information on services trade. One result of this is a downward revision of year-2025 private consumption.

For instance, services trade appears to have been underestimated in the previous version of the data, but this is accompanied by a change in the way demand is split between domestic consumption and external trade. These shifts affect the data retroactive to 2023, as the updated deflation indices also cause a change in volumes.

For 2025, the revision also includes public consumption and public investment, which were previously based in part on preliminary numbers. SI states as well that business investment in 2025 is still highly uncertain and that a further revision will probably be carried out once more detailed information from asset registries is available in November. For 2024, a large share of the revision is due to a re-estimation of research and development spending, which has been transferred to gross capital formation.

This strengthens the feeling that the structure of underlying GDP growth in recent years has been different than previously thought, with consumption growth somewhat weaker and the weight of services trade and investment relatively greater. On the whole, GDP growth for 2025 is now estimated to be weaker than in previous figures, while the measured contraction in 2024 was smaller and growth in 2023 stronger. The net impact of the review is therefore to revise GDP growth upwards by 0.4 percentage points in 2023-2025 combined.

GDP growth set to gain ground steadily in the coming term

The figures described above do not materially change our projection of year-2026 GDP growth. The contraction in Q2 is offset by an upward revision of Q1 data, and GDP growth is now estimated to have measured 3.8% at the start of the year. As a consequence, H1 is in line with our forecast of 1.3% GDP growth for the year as a whole. The composition of growth thus far in 2026 is different from what we have previously envisioned, though, with domestic demand more resilient and external trade weaker. As is noted before, this is due not least to the impact of massive investment in data centres.

As before, we assume a steady rise in GDP growth over the two years ahead, alongside an improvement in exports and increasingly solid demand with a lower real interest rate.

In our view, the new national accounts do not change the monetary policy picture to any decisive degree, even though the Central Bank (CBI) projected marginal growth in Q2 instead of the contraction showing in SI’s figures. Nor do the numbers indicate that the economy is in recession requiring a swift response from the CBI, as the bank already assumes that GDP growth will be tepid this year. Inflation, inflation expectations, and developments in domestic cost pressures will continue to weigh heavily in upcoming interest rate decisions unless the GDP growth outlook worsens even more in coming quarters.