Household deposits have grown considerably alongside rising interest rates. This has resulted in greatly increased interest income for households, in fact in excess of interest expenses.

A majority of the market now consider the monetary policy stance too tight. This opinion has become much more pervasive than in April, in response to steadily growing restraint alongside receding inflation and unchanged interest rates.

Economic growth will be limited in coming years according to our newly published macroeconomic forecast up to and including 2026. We forecast 0.9% growth this year, 2.2% next year and 2.6% in 2026. We expect inflation to recede down to 5.5% by the fourth quarter of this year. A rate-cutting cycle will begin in October, so our forecast, and we expect the economy to pick up speed alongside falling interest rates.

Nominal housing prices have risen by 5.2% in the past 12 months, according to a new housing price index, and the real price of residential housing is slightly higher than the same time last year.

Inflation will recede somewhat in April, from 6.8% to 6.1%, only to remain fairly stable in the coming months and stand at 5.9% in July, according to our newest inflation forecast. Despite the dent interest rate increases have made in demand, the economy is still going fairly strong and there is tension in the labour market. Inflation expectations remain well above target.

Around 14% more tourists travelled through Keflavík International Airport in February of this year than the same month of 2023. The duration of stays is shorter than before, with registered overnight stays declining by 2.7% between years in February.

Figures for 2023 indicate that international tourists had fewer overnight stays in Iceland on average as compared to 2022 yet spent more per day than previously.

The three large export sectors, tourism (ISK 600 bn), aluminium and aluminium products (ISK 320 bn) and seafood products (ISK 350 bn), were behind 70% of total export value in 2023. Other export created value in the amount of ISK 580 bn, more than either seafood products or aluminium and aluminium products.

After almost two years of very robust economic growth in the post-pandemic era, the economy slowed down considerably as 2023 progressed.

There was a continuous surplus on foreign trade in the years 2010 to 2019. This turned to a deficit in 2020 and 2021 during the pandemic. Foreign trade has been more or less balanced since.

The composition of the labour market has changed somewhat since 1991. Managers, specialists, professionally qualified staff and service and retail sector employees have grown in number while office workers, farmers and fishermen have grown fewer.

Inflation has decreased in recent months and, in addition, fewer components have increased by over 10% in the past 12 months.

Last year, wages increased by 10% on average between years. Despite much higher wages, their purchasing power, i.e. the goods and services that can be purchased for wages, only grew by 1%.

Total government expenditure on domestic research and development (R&D) was 2.7% of GDP in 2022. This is slightly higher than the EU average yet lower than in countries like Denmark, Finland, Sweden and Germany.

Just over 2.2 million tourists departed from Leifsstöð International Airport in 2023, in line with our October forecast. In that same forecast, we anticipate 2.3 million tourists in 2024. The year 2023 is the second largest tourist year from the beginning, only topped by 2018, when 2.3 million travellers visited Iceland. This past year only just exceeded 2017, which was previously the second largest tourist year.

Tension in the labour market appears to be easing as high interest rates have a slowing effect on the economy. Markedly fewer business managers respond that there is no shortage of employees, in the Central Bank’s and Gallup’s survey among 400 largest domestic enterprises. Unemployment has not risen to any extent and measured 3.4% in November.

Since the beginning of 2016, individual disposable income has risen by 54%, yet purchasing power has increased by only 12%, having regard for inflation in the same period.

The number of first-time buyers on the housing market is up by 40% between the second and third quarter of the year. They went from 26% to 33% of all buyers, which is similar to pandemic figures, when interest rates were at their lowest.

Economic growth was only 1.1% in the third quarter; clearly, high interest rates have slowed the economy markedly. Ever since the second quarter of 2021, following the sharp pandemic-related contraction, growth has measured over 4% every single quarter.

The number of first-time buyers on the housing market grew substantially in the third quarter of the year, to 1,123 or 33% of all buyers. In the second quarter, first-time buyers numbered 789, or 26% of all buyers.

In the most recent market expectation survey, carried out two weeks ago, a majority of respondents considered the monetary policy stance too tight rather than too loose. This is quite a change - the majority has considered the stance too loose since January 2020.

Icelanders’ online spending generally peaks in November. This is largely due to the bargains and sales prevalent in November, such as Singles’ Day, Black Friday and Cyber Monday.

After overheating in the aftermath of the Covid pandemic, the Icelandic economy has slowed down and it is clear that we will see considerably less growth this year compared to last year. High interest rate levels have curtailed demand, both private consumption and investment. Following a hefty inflation spike, the outlook is for slow disinflation over the coming months. We do not expect the Central Bank of Iceland to raise the policy rate further in the near future, nor do we expect to see rate cuts until the second quarter of 2024. We expect the policy rate to have come down to 4.25% at year-end 2026.

A new macroeconomic forecast from Landsbankinn Economic Research expects to see 3.2% economic growth in 2023 and is considerably more optimistic than the department’s forecast from October 2022. One of the main reasons for optimism is the more positive outlook in the travel sector.

Landsbankinn Economic Research forecasts a cooling of the economy in coming years, despite continued economic growth. Inflation will recede slowly and interest rate levels continue to rise.

Landsbankinn Economic Research forecasts 6.5% economic growth this year, record growth since 2007, only for considerable cooling to follow. Per the forecast, the policy rate will enter a rate-cutting cycle in the latter part of 2023 while inflation remains about 4% until 2025. Purchasing power looks set to contract by 0.4% this year but to pick up to the tune of 0.5% next year - a much slower increase than in recent year.

We forecast 6.5% economic growth in Iceland this year, the greatest since 2007. Robust growth in export sectors coupled with strong domestic demand has driven handsome GDP growth in the past year.