Domestic demand, which largely reflects consumption and investment, grew by 4.7% YoY. The contribution from inventory changes to domestic demand was unusually strong, accounting for 1.8 percentage points of Q3 growth. According to SI’s press release, the difference was due mainly to larger inventories in the fishing industry, not least because of base effects from the capelin catch failure in 2024. On the other hand, the contribution from net trade was negative by 3.5%.

It has now been negative ever since the beginning of 2024. As the chart below illustrates, this is attributable mainly strong growth in imports concurrent with alternating weak growth and shrinking goods exports. In a new twist, however, the contribution of services trade to growth has also been negative in 2025 to date.

A sizeable share of the past few quarters’ surge in goods imports is due to rapid growth in imports of investment inputs. Fortunately, though, investment inputs are used to boost production, both for domestic use and for exports. We have previously discussed the boom in computer equipment imports from autumn 2024 through this year. Most of the goods concerned represent infrastructure for data centres, which will ultimately deliver increased services export revenues. It can be said that with these projects, Iceland is indirectly exporting energy via undersea cable, although the cable in this instance is a fibre optic cable and not a conventional power line.

Investment holding its own

Activity in the data centre industry can also be seen in developments in investment thus far in 2025. Business investment grew by over 11% in Q3, although residential investment and public investment shrank by 10.3% and 15.8%, respectively, during the quarter.

Because quarterly movements in investment figures tend to fluctuate widely, we consider it more useful to compare the first three quarters of 2025 combined with the same period in 2024, which helps us obtain a clearer picture of how investment is shaping up. Such a comparison shows that total investment grew by more than 10% YoY during the three-quarter period. All of that growth is due to the nearly 16% increase in business investment, as both residential and public investment were virtually flat. As is noted above, business investment for the period stemmed primarily from imports of data centre-related computer equipment for tens of billions of ISK per month in the recent past, about ten times the average for the quarters beforehand.

Robust private consumption

Private consumption remains strong as well, as can be seen in related indicators, which we have discussed recently. In Q3/2025, private consumption grew in real terms by just over 4% YoY. SI notes in its press release that consumption within Iceland has grown across the board, owing not least to households’ purchases of service-related goods. On the other hand, there was a contraction in purchases of goods such as clothing in the domestic market, and overseas consumption grew markedly during the quarter.

Thus far in 2025, private consumption has grown by 3.6% in volume terms relative to the first nine months of 2024, whereas it grew by less than a percentage point per year in 2023 and 2024. This shift is even more interesting because of the significant YoY slowdown in population growth in 2025 to date. It therefore appears obvious that most households are in good financial shape at present and are not clutching their wallets as tightly as before. New registrations of motor vehicles to individuals have soared, for instance, after imploding in 2024.

Furthermore, public consumption – a blanket term covering services such as education and healthcare, which are provided by the public sector but consumed by households – increased in real terms by less than a percentage point in Q3. In this case, a nearly 8% rise in prices all but swallowed up the increase in consumption, which measured nearly 9% in ISK terms. These figures have an intriguing story to tell, and it will be interesting to see SI’s analysis of them in its 11 December news release on general government finances.

GDP set to grow modestly rather than contracting

As we had expected in our discussion of the national accounts in early September, GDP growth figures for H1/2025 were revised strongly upwards concurrent with the publication of Q3 data. The economy is therefore more resilient than the initial H1 numbers had suggested. SI now estimates GDP growth for H1 at 1.7%, up from a paltry 0.3% in the earlier figures. In the new figures, investment appears to be better aligned with investment goods imports than in the previous numbers.

According to SI’s preliminary figures, GDP growth measured 1.5% in the first three quarters of 2025. This is a welcome turnaround from the 1.2% contraction in 2024 according to SI’s revised figures. The revision extended back to 2023, yielding figures showing that GDP contracted by 1.2% in 2024, or 0.2% more than was initially estimated. Furthermore, SI has revised year-2023 GDP growth slightly downwards, from the original 5.2% to 5.1%. In the 2024 data, the downward revision of investment contributed the most to the change, while for 2023 the main difference was in weaker exports, which slightly exceeded the estimated increase in investment for the year.

In our macroeconomic forecast from September, we projected that GDP growth would measure almost 2% in 2025 as a whole. On the other hand, the Central Bank (CBI) projected it at only 0.9% in its most recent Monetary Bulletin, published last week. It is worth noting that the CBI expected a contraction in Q3 and had based its projections on SI’s previous figures for H1. Based on SI’s new numbers, we think it likely that the outcome for the year will be somewhere in the middle, probably around 1.5%

The outlook for 2026 is considerably more ambiguous than we envisioned in September, however, owing to the shocks that have rained down on the export sector, together with increased uncertainty about tourism. The CBI forecasts 2026 GDP growth at 1.6%, whereas the scenario we published recently estimates it at just under 1%. As these numbers suggest, we do not expect a contraction, but the economy is highly likely to keep cooling at a brisk pace.