The Icelandic Economy- H1 2024

The report covers the development of short-term indicators, the current state and outlook of the economy, external trade in goods and services, inflation and currency developments and outlook, and other economic insights. 

Economic Developments 

The Icelandic economy showed a strong recovery, after a sharp dip during the pandemic. Economic growth in 2022 measured at 8.9%, which is the highest economic growth recorded since 1971. The economy continued to grow in 2023, when economic growth measured 4.1%, with growth in public consumption and exports weighing the most. It is expected that the economy will slow down this year and the Central Bank predicts that economic growth will be 1.9% in 2024. 

Strong economic growth and the government's deficit, along with increased activity in the housing market and the recovery of private consumption after the pandemic, were accompanied by high inflation. The central bank responded by significantly tightening monetary policy. After fourteen interest rate increases in a row, the key interest rate has remained unchanged at 9.25% from August 2023. Inflation has slowed, after it peaked at 10.2% in February 2023, but stands now at 6%. The central bank expects inflation this year to be 5% and inflation expectations among market agents for the next five years are still above the inflation target. 

There are signs that the housing market is starting to pick up again, after a decrease in real housing prices that begun in the middle of 2022. The housing price index in the capital area seems to have reached a certain balance in the middle of 2023, but rose slightly between December 2023 and January 2024. Turnover started to increase again in the housing market in the second half of 2023, along with increase in the number of purchase contracts. 

Collective bargaining agreements were signed in March. The agreements stipulate a 3.25% salary increase in the first year of the contract and 3.5% in the next three years. However, the increase will never be less than ISK 23,750 per year. The impact of the agreements on the economy has yet to be seen, but the month-on-month wage index increase in March was 2.4%, which can largely be explained by contractual increases. 

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Iceland at Glance 

Iceland retains its 16th place among 64 economies in competitiveness according to IMD Business School's latest report, marking the second consecutive year in this position—a commendable achievement considering the country's relative size. 

This ranking reflects Iceland's exemplary infrastructure and improved economic performance, particularly in the labour market. Conversely, for the first time in a decade, business efficiency has declined, and government efficiency is at an eight-year low. 

Furthermore, high educational standards, a dynamic economy, and positive, open attitudes are some of Iceland's most attractive features, as highlighted in a recent survey among executives in Iceland, published alongside the competitiveness report. 

The Chamber offers presentations based on the report. For further information, please contact our Economists, Gunnar Úlfarsson (gunnaru@vi.is) and Ragnar Sigurður Kristjánsson (ragnars@vi.is).