Resilient private consumption

Private consumption remained strong despite persistent inflation and high interest rates, growing in real terms by 2.2% YoY. According to SI’s press release, the outcome reflects a surge in households’ car purchases and increased spending on travels abroad, on the one hand, and a decline in general consumption spending in the domestic economy, on the other. This private consumption growth rate lines up quite well with recent developments in payment card turnover: the newest data show that overseas card use has been the mainstay of growth, while card use in the local market has contracted. In addition, public consumption, which includes spending on healthcare and the educational system, grew by 0.8%.

Sudden dip in investment

As is noted above, investment plunged during the quarter. Total investment fell by 12% YoY in real terms, with all key components of investment shrinking during the period. Business investment was down 12%, public investment tumbled 18.5%, and investment in new residential housing fell by over 8%. SI mentions that even though investment in data centres remains strong, it shrank as well between years.

It is worth remembering that investment figures in the quarterly national accounts fluctuate widely and are generally subject to larger revisions than other key components. In Q1/2025, for instance, investment growth measured over 17%, which means that base effects are probably responsible for a fat slice of this year’s Q1 contraction. Furthermore, individual large projects can have a strong impact on quarterly data, as is currently the case with data centre development.

Exports on the upswing, but imports are easing

As is noted above, a brisk improvement in the contribution of net trade to output growth was the main driver of GDP growth during the quarter. External trade contributed 5.3% to GDP growth, making Q1/2026 the first quarter since Q4/2024 to see a positive contribution.

SI had previously published figures on goods and services trade in Q1. According to those numbers, the trade balance was positive by just under ISK 6bn, down from ISK 66.5bn a year earlier. The data centre sector played a key role in this turnaround, which can be viewed as the mirror image of developments in business investment. Iceland’s large current account deficit in Q1/2025 was due largely to the tidal wave of equipment imports for data centres. These imports have been far less strong in 2026 to date, while data centre-related export revenues have surged. This is a pattern Icelanders have seen before in connection with large-scale investment – in the aluminium industry, for example.

Muted GDP growth in the cards for 2026

It can be said without exaggeration that 2026 has burst out of the starting blocks in terms of GDP growth. The growth rate for the year as a whole is likely to be far weaker, though. The outlook is for a continued contraction in investment, the most recent indicators suggest that households are holding their wallets closer to the vest, and the interplay between exports and imports is unlikely to remain as favourable as the figures above indicate. In our assessment, though, the outlook for 2026 as a whole is reasonably favourable. Real wages are still growing and unemployment is not rising excessively; furthermore, strong investment in sectors such as land-based aquaculture and data centres, plus fairly robust infrastructure investment, will pull against the general contraction in other business investment.

In our last macroeconomic forecast, published at the end of January, we projected that GDP growth would measure 0.6% this year. Since then, the outlook for exports has brightened somewhat, owing to a favourable capelin season, improved prospects for tourism during the peak season ahead, and less disruption in aluminium production at the Grundartangi plant than was previously expected. On the other hand, interest rates will presumably be higher than we had anticipated, with the associated impact on consumption and investment.

Just last week, the Central Bank (CBI) projected year-2026 GDP growth at 1.6%. Developments year-to-date suggest that growth will be roughly in line with that projection, and against the current backdrop of geopolitical challenges abroad and persistent inflation and high interest rates at home, we can say that such an outcome is not the worst thing that could happen.