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Casual economic growth, adjustment in tourism and moderate inflation

The pace of economic growth in Iceland will slow alongside an adjustment period in the travel industry. Even so, conditions do not necessitate an adjustment or landing of the economy. The inflation outlook for coming years is good, the ISK exchange rate looks to be stable and despite of some boom indications in private consumption, its growth remains within reason. Various uncertainty factors may, however, have a significant impact. These are among the highlights of the macroeconomic and inflation forecast of Landsbankinn Economic Research, looking forward until the year 2020.

Landsbankinn Economic Research publishes an in-depth macroeconomic and inflation forecast for the coming three years in fall and reviews its forecast in May of each year. The reviewed forecast states that economic conditions in Iceland are in most respects very good. Economic growth has been strong and inflation low. The general inflation outlook is positive, with tension likely to subside as economic activity increasingly trends towards long-term sustainability. Household, corporate and sovereign debt, as well as the indebtedness of the entire national economy, is currently at optimal levels despite considerable economic expansion in recent years.

Key points from the macroeconomic and inflation forecast

  • Economic growth in 2018 will be 4.1% which is above historic average in Iceland. There will be a slow-down in economic growth in 2019 and 2020 and growth will be just under long-term average both years, or around 2.4%.
  • The tourism boom is over and slower and more sustainable growth is expected in that sector.
  • Inflation can be expected to increase slightly and to average 2.4% in 2018 and 2.8% in 2019 and 2020.
  • The ISK is expected to appreciate slightly throughout the year to remain fairly steady next year and depreciate a little in 2020.
  • The Central Bank of Iceland is expected to hold the policy rate unchanged for the remainder of the year, raise it by 0.25 percentage points in 2019 and lower it by as much again in 2020.
  • Unemployment will remain low and the labour market strong.
  • Investment will slow. The drivers of capital formation will be housing investment and public investment with a negligible contribution from industrial investment despite conditions for increased industrial investment seldom, if ever, having been as favourable by various measures.
  • Real estate prices will rise by around 5% in 2018, and 6% in 2019 and 2020.
  • Considerable uncertainty about economic developments in coming years might lead to significant deviations from Economic Research's forecast.
  • The forecast assumes a slight increase in traveller numbers in coming years. Should there on the other hand be a reduction in travellers to Iceland in the near future, economic growth would decrease considerably, manifesting in lower export levels, less private consumption and reduced investment.
  • Other uncertainty factors include ISK exchange rate developments, real estate prices and wage developments for a large portion of the labour market, as collective bargaining agreements are up for re-negotiation next year.
  • Despite increased tension in international politics, the global economic outlook is bright.

Read Landsbankinn’s macroeconomic and inflation forecast on Umræðan (in Icelandic)