According to Íslandsbanki’s new macroeconomic forecast, GDP growth will be broadly unchanged year-on-year in 2026 and then steadily gain momentum over the forecast horizon. This year it will be driven largely by external trade, with exports outpacing imports. At the same time, private consumption will grow more slowly than previously projected, while investment will be virtually flat. GDP growth will pick up again in 2027 and 2028, supported by a resurgence of domestic demand, a turnaround in residential investment, and broad-based growth in exports, not least in the intellectual property and land-based aquaculture sectors.
Macroeconomic forecast: Gradual growth, growing resilience
Íslandsbanki Research issues macroeconomic forecast for 2026-2028
Inflation has once again proven more stubborn than previously forecast and is now largely services-driven. A wider slack in the economy and modest pay rises should support disinflation over the forecast horizon, however. The review clause in wage agreements was triggered in September, but the forecast assumes that contracts will hold, although wages will rise slightly more in 2027 than is provided for in the current contracts. Unemployment will persist into 2027 and then start to ease as economic activity firms up.
The policy rate has been raised by 0.75 percentage points year-to-date and is now 8.0%. ÍSB Research is of the view that the monetary tightening phase is at an end and that the policy rate will be held steady until next spring. A gradual unwinding will follow, lasting until well into 2028, possibly ending with the policy rate around 6%.
Highlights
GDP growth – Steady gains over the forecast horizon. GDP growth is forecast at 1.2% in 2026, 1.8% in 2027, and 2.3% in 2028
External trade – Current account deficit set to narrow over the forecast period. The CA deficit will measure 3.3% this year and around 1.0% per year in 2027-2028
Labour market – Slack in the market, yet wages continue to climb. The wage index will rise by 6.2% in 2026, 6.0% in 2027, and 4.9% in 2028
Inflation – A wider slack in the economy and modest pay rises will support disinflation during the forecast horizon. Inflation is projected to average 5.4% in 2026, 4.5% in 2027, and 3.6% in 2028
Interest rates – The policy rate is expected to remain flat through end-2026 and then start falling gradually from Q2/2027 onwards. It could measure around 6% in the final year of the forecast horizon
The ISK – A depreciation grows steadily more likely over the forecast horizon. The exchange rate is projected to be about 4% lower at the end of the period
