The economy was slightly stronger last year than previously estimated. Statistics Iceland estimates that GDP growth for the year as a whole was 0.5%*, primarily driven by increased industrial investment and investment in residential housing. In our latest economic forecast from October, we predicted a 0.1% contraction for the year and most other analysts also expected a slight decline. Statistics Iceland revised GDP figures for the first three quarters of 2024 and for 2023 upwards.
Inflation continued to move in the right direction in February, decreasing from 4.6% to 4.2%. This decrease was broadly in line with forecasts, although food prices rose more than we anticipated, with clothing and footwear rose less than we expectations. We expect inflation to continue on this downward trajectory in March and to reach 3.9%.
The Monetary Policy Committee announces its next interest rate decision on 19 March, with February inflation figures being the latest data available to the MPC. While favourable inflation trends could open the door for another 50 basis point rate cut in March, the strength of the economy and ever-rising domestic payment card turnover could counterbalance this. In this context, it is also worth noting the significant jump in the housing price index in January, although this was primarily due to price increases in single-family dwellings and as such provides limited insight into underlying pressure.
Teachers signed a wage agreement at the end of the month following a tough dispute with the municipal negotiation committee. According to the agreement, teachers will receive a salary increase of approximately 24% over a four-year period, considerably more than other groups. Reactions from representatives of other labour market groups have reflected this. If these agreements disrupt the labour market stability that has been achieved, they could lead to increased uncertainty and even higher inflation in the long term. Public data suggests that labour market pressure is continuing to ease, with demand for labour declining. Unemployment rose significantly in January, to 4.2%, and could continue to increase in February and March.
*An error was found in previously published data from Statistics Iceland. GDP increased by 0.5%, not 0.6% in 2024 as was presented prior to the correction.
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