According to Íslandsbanki’s new macroeconomic forecast, GDP growth will measure 1.9% in 2025. Rising private consumption will be the main driver, with support from robust investment growth and moderate export growth. For the next two years, the outlook is for GDP growth to gain pace steadily. We expect it to measure 2.3% in 2026 and 2.9% in 2027. It can be said, then, that the economy is lifting off again after touching down briefly.
Macroeconomic forecast: Economy touches down, then lifts off gradually
Íslandsbanki Research issues macroeconomic forecast for 2025-2027
Although the output gap is narrowing apace and the labour market is rebalancing, the outlook is for somewhat stubborn inflation. Even so, the scope will develop for more policy rate cuts further ahead.
Highlights
GDP growth – Growth is forecast at 1.9% in 2025, 2.3% in 2026, and 2.9% in 2027
Current account – 2.0% deficit in 2025 and a balanced current account in 2026 and 2027
Labour market – A temporary slack in the labour market will be accompanied by robust wage growth. Unemployment is set to average 3.9% in 2025, 3.7% in 2026, and 3.5% in 2027. Wages are projected to rise by 7.7% in 2025 and then 5.0% per year in 2026 and 2027
Inflation – Inflation will keep declining incrementally early in the forecast horizon. It will average 3.9% in 2025 and 3.5% in both 2026 and 2027
Interest rates – Policy rate cuts set to lose pace as disinflation slows. The policy rate is forecast at 7.0% at the end of 2025 and 5.0-5.5% in the final year of the forecast horizon
The ISK – Improvements in external trade and the interest rate differential will support the ISK in the coming term. An ISK depreciation will grow steadily more likely as the forecast period progresses
