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Iceland Economic growth will come down to 4.4% in 2023 and 2.6% in 2024. Private consumption will slow as wages moderate. So will business investment as financial conditions continue to tighten, and public investment will barely grow. In contrast, residential investment will pick up in the near term to work off pent-up demand. Export growth will slow given only modest growth in major trading partners. The unemployment rate will gradually rise towards 4.5% by the end of 2024. Headline inflation is expected to decline from around 10% in early 2023 to around 3% by late 2024. In May, the central bank lifted the policy rate to 8.75%, the thirteenth increase since tightening started in May 2021 at 0.75%. The policy interest rate could be raised further to re-anchor inflation expectations and bring back inflation towards the 2.5% target. The fiscal consolidation planned for 2023-24 is appropriate to reduce inflationary pressures and maintain fiscal space. To foster sustainable productivity growth and help diversify the economy, innovation should be strengthened further, and the gender balance should become more equal across sectors. Growth has peaked The economy is slowing gradually, despite foreign tourism heading rapidly towards pre-pandemic levels. Exports of goods and services rich in energy content are weakening as global energy prices have come down. Household consumption is moderating. The late 2022 wage agreements may have halted the decline in real wages. Business investment is slowing as financial conditions become tighter and confidence declines. Government investment is barely growing. Inflation is hovering at around 10% since early 2023. The labour market remains tight, with the unemployment rate at around 3.5%, and labour participation continues expanding.
Iceland
1. The sum of components may deviate from observed GDP growth because of balancing items, chain-linking procedures and direct/indirect seasonal adjustment methods. Source: OECD Economic Outlook 113 database; Statistics Iceland; and Central Bank of Iceland. StatLink 2 https://stat.link/5ytv3o
OECD ECONOMIC OUTLOOK, VOLUME 2023 ISSUE 1: PRELIMINARY VERSION © OECD 2023