According to Íslandsbanki’s new macroeconomic forecast, a new business cycle featuring moderate GDP growth lies ahead. Robust private consumption and stronger exports will drive growth over the forecast horizon, with fluctuations in investment having a considerable impact. Tourism is expected to grow slowly over the forecast period, while intellectual property and aquaculture are set to take the lead as key growth sectors. Immigration of foreign workers has slowed markedly, suggesting a shift in the labour market. Most indicators imply increased slack in the labour market, and pay rises are more modest than in recent years.
Macroeconomic forecast: Economic equinox
Íslandsbanki Research issues macroeconomic forecast for 2025-2027
Inflation will continue to ease gradually early in the forecast horizon, but the final leg of the journey back to the target will be difficult. Policy rate cuts will resume in H1/2026 but will proceed gradually, in line with the disinflation process. The outlook is for the ISK to be relatively strong in the near future, buoyed up by improvements in external trade and the interest rate differential with abroad, together with Iceland’s strong international investment position. The real exchange rate is quite high, however, and a nominal ISK depreciation will grow ever likelier over the forecast period.
Highlights
GDP growth – growth is forecast at 2.2% in 2025, 1.7% in 2026, and 2.4% in 2027. Robust private consumption and stronger exports drive growth over the forecast horizon
External trade – 1.8% current account deficit in 2025, followed by improvements in trade over the horizon and a neutral current account balance in 2027
Labour market – slack in the labour market, yet with fairly hefty pay increases. Wages to rise 7.8% in 2025, 5.4% in 2026, and 5.3% in 2027
Inflation – inflation eases slowly but will struggle to realign with the target. It is set to average 4.1% in 2025, 3.9% in 2026, and 3.7% in 2027
Interest rates – unwinding process to start again in H1/2026. Policy rate 7.5% at end-2025 and 5.5-6.0% in the final year of the forecast horizon
ISK – the currency is likely to depreciate later in the forecast period. We expect it to weaken by 4-5% over the horizon
