Furthermore, Gallup’s new big-ticket index measurement suggests that consumers are gearing up for major purchases. The big-ticket index has dipped marginally relative to Q4 but is still at a fairly high level relative to the recent past. As the chart indicates, the rise in the index in H2/2024 was driven mainly by planned car purchases and overseas travel. According to recent figures on new motor vehicle registrations and Icelandic nationals’ departures via Keflavík Airport, consumers have put their money where their mouth is, as both sets of data show a handsome increase year-to-date.

Consumer expectations correlate strongly with developments in private consumption; therefore, a rise in the CCI generally harbingers an upward trend in private consumption. The same can be said of the big-ticket index, although it tends to fluctuate less than the CCI does. Thus the year-on-year rise in the two indices in 2025 to date signals quite strongly that private consumption is gaining steam at present and will keep doing so in the months ahead.

At the end of January, we projected that private consumption would grow by 2.7% in 2025. In comparison, private consumption growth measured only 0.6% last year, and private consumption per capita contracted. In our opinion, most of the above indicators imply that this forecast is still valid.

Business executives growing more upbeat

Executives from Iceland’s largest firms have also grown more upbeat in recent quarters, according to the quarterly Gallup survey conducted for SA and the CBI. Executives were gloomy about the economy and labour market situation last autumn, but now the optimists outnumber the pessimists. In fact, the assessment of the current situation is at its most positive in three years.

Executives who are optimistic about the outlook six months ahead also outnumber their downbeat peers, although this index component has declined since Q4/2024. According to a press release from SA, uncertainty about tariffs and world trade during the measurement period may have affected the results. Based on responses from key sectors, the fishing industry is far more pessimistic than other sectors. Furthermore, expectations among tourism and shipping companies are relatively subdued, while executives from companies in industry and construction are the most optimistic about the six-month outlook. Presumably, this reflects the challenges that lie ahead for export sectors at a time when domestic demand looks set to be more or less undiminished.

Furthermore, responses to survey questions about the labour market suggest that the market remains sturdy. The share of companies reporting staff shortages has fallen markedly, though, measuring 23% for the second quarter in a row, after peaking at 56% two-and-a-half years ago. In this regard, the construction sector stands out from the rest, in that nearly half of companies in construction and utilities report being understaffed. At the other extreme, only 8% of financial industry executives consider their firms short-staffed.

The Gallup survey also measures expected demand for labour. Companies are asked whether they expect to lay off employees, recruit them, or hold their personnel level unchanged in the coming six months. The dispersion of responses can be encapsulated with what we call the employment expectations indicator, expressed as the ratio of positive to negative responses and weighted in much the same way as the Consumer Confidence Index is.

The graph at the right shows developments in this indicator, together with developments in unemployment according to the Statistics Iceland (SI) labour force survey (LFS). As can be seen, the employment expectations indicator showed a fairly strong downward trend from mid-2022 until autumn 2024. Since then, it has rebounded strongly.

It is interesting to compare this abrupt turnaround with developments in unemployment. With some effort, it is possible to discern a correlation between the employment expectations indicator and LFS-based unemployment with a lag of 1-2 quarters. The most recent survey-based measure of unemployment shows a spike in the first two quarters of 2025. It should be borne in mind, though, that monthly unemployment measurements according to the LFS tend to fluctuate far more than, for instance, registered unemployment according to the Directorate of Labour (DoL). Even so, the DoL also reports a gradual rise in seasonally adjusted unemployment. It will be intriguing to see whether this trend reverses in the next few months, as could be assumed based on the most recent employment expectations indicator value.

Inflation expectations remain elevated

Although the recent expectations surveys also show positive signs as regards domestic demand and the labour market, the outlook for inflation expectations is cloudier. For instance, households’ and businesses’ long-term inflation expectations held broadly unchanged quarter-on-quarter in the newest measurements, published recently on the CBI website. Households expect inflation to average 4% over the next five years, while executives expect 3.5% inflation over the same period. Both groups’ long-term expectations fell noticeably in Q4/2024, and presumably, it will be a source of some concern for the CBI’s Monetary Policy Committee that they have stalled in Q1/2025.

To summarise, the above-mentioned expectations surveys suggest that domestic demand may well gain traction in the quarters ahead, after muted growth in 2024. When this is viewed against a backdrop of persistently high inflation expectations, it is understandable that the CBI should prefer to move cautiously in lowering the policy rate in the coming term.