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New macroeconomic forecast: Moderate growth ahead

This is the eighth edition of Þjóðhagur, the annual review of Landsbankinn Economic Research. Þjóðhagur focuses on developments and outlook in the economy. It features Economic Research's macroeconomic and inflation forecast, provides a comparison with the previous forecast and forecasts from other key analysts.

Economic conditions in Iceland have in most respects been extremely favourable in recent years. Inflation has held steady under the Central Bank's 2.5% target since February 2014 and until the middle of this year, and economic growth has been continuous since 2011. The purchasing power of wages has never been higher, unemployment levels are low and household and corporate debt is at an historic low. The National Treasury is very strong and net foreign debt has never before been as favourable.

It appears that a changing point has been reached in the economic cycle. Landsbankinn Economic Research expects economic growth to slow considerably in coming years following the robust growth period of recent years. According to the forecast, economic growth will be 3.9% in 2018, 2.4% next year and just over 2% in 2020 and 2021. Inflation has begun to make its presence felt and the inflation outlook for the forecast period is rather poorer than in recent years. We expect inflation to have reached 3.5% at the end of this year. Inflation is expected to be slightly over target on average during the forecast period yet to trend back towards target at the forecast horizon. According to the inflation forecast, inflation will average 3.3% in 2019-2021.

Economic forecast 2018-2021 - excerpt in English