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Macroeconomic forecast June 2019

GDP looks set to contract by 0.7% in 2019 as a whole, making this year the first to see a contraction since 2010. For 2020, we expect relatively slow GDP growth of around 1.5%, driven by private consumption and investment in residential housing and infrastructure. We expect growth to pick up in 2021, measuring 2.7% for the year, as exports and business investment firm up again.

The Icelandic economy has been buoyant for much of the current decade, with GDP growth averaging 4.5% per year in 2013-2018. The growth episode has been underpinned by the boom in tourism, supported by other favourable factors that have fuelled growth in private consumption and investment. Domestic demand gradually took over from exports as the main driver of growth as the period advanced.

Figures for Q1/2019 show clearly that the economy is cooling. GDP growth measured 1.7% for the quarter. WOW Air folded its tent at the end of Q1, and the March-April month-end therefore marks a clear turning point in the domestic economy.

GDP looks set to contract by 0.7% in 2019 as a whole, making this year the first to see a contraction since 2010. An abrupt decline in exports is the main factor in this year’s economic downturn, aided by a marked reduction in business investment. Private consumption growth will be sluggish as well. On the other hand, imports will probably contract significantly between years also.

For 2020, we expect relatively slow GDP growth of around 1.5%, driven by private consumption and investment in residential housing and infrastructure. We expect growth to pick up in 2021, measuring 2.7% for the year, as exports and business investment firm up again.

Islandsbanki Research Macroeconomic forecast

Authors

Jon Bentsson

Chief economist

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Bergþóra Baldursdóttir

Analyst

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