The Icelandic Economy Navigates the Wave: Economic Outlook 2025-2028
According to Arion Bank’s new economic forecast, the economy will set sail again after contracting last year. Domestic demand – led by private consumption – has been stronger than previously assumed and will remain the main engine of growth. Even though sizable imports related to data centers and land-based aquaculture will make net trade a major drag this year, the prospects for exports have hardly improved: flight capacity to Iceland has been sharply reduced, the króna is strong, and uncertainty around the economic policies of the world’s largest economies remains elevated.
Next year, imports are set to decline – mainly because of lower investment by the data centers – and net trade should make a positive contribution to GDP growth. Although private consumption is expected to be the main driving force of growth throughout the forecast horizon, the outlook is more blurred than usual: inflation has proved persistent, and interest rates are therefore likely to stay high for longer than previously forecast. The full impact on domestic demand has yet to materialize, but cooling is evident in both the labor market and the housing market.
We expect the tight monetary policy to have a more visible impact next year, with higher unemployment and declining housing prices in real terms. However, every cloud has a silver lining: higher unemployment, all else equal, eases inflationary pressures. While inflation is set to remain above target through the forecast horizon, we expect two rate cuts next year, with the policy rate reaching 6.25% by the very end of the period. The króna – which is currently very strong – could, if it weakened markedly, impede disinflation, but in this forecast we assume only a modest depreciation from next year onward.
As always, uncertainty is considerable, not least internationally, and the final shape of rising protectionism in global trade is still unclear. However things play out, the Icelandic economy is well equipped to navigate through rough waters.
The Icelandic Economy Navigates the Wave: Economic Outlook 2025-2028
Photos from the event
