17.11.2025
Iceland’s economy is projected to return to moderate growth over 2025–27 after weakness in 2024 and a mixed first half of 2025. Real GDP growth is forecast at 2.1% in 2025 and to strengthen to 2.3% in 2026 and 2.4% in 2027, supported by a gradual recovery in exports and stronger domestic demand as monetary easing continues. Inflation is expected to keep moderating but to remain above the central bank’s target, while unemployment is projected to hover around 4% and public debt to continue declining.
| Indicators | 2025 | 2026 | 2027 |
|---|---|---|---|
| GDP growth (%, yoy) | 2.1 | 2.3 | 2.4 |
| Inflation (%, yoy) | 3.8 | 3.2 | 2.7 |
| Unemployment (%) | 4.2 | 4.5 | 4.2 |
| General government balance (% of GDP) | -1.3 | -0.8 | -0.7 |
| Gross public debt (% of GDP) | 57.2 | 55.0 | 53.0 |
| Current account balance (% of GDP) | -3.9 | -3.4 | -3.4 |
Gradual pick-up supported by domestic demand and export recovery
After a contraction in 2024 and subdued activity in early 2025, the outlook points to a gradual recovery, underpinned by increasing domestic demand and a recovery in exports. Monetary easing is expected to continue gradually, supporting private consumption and investment, while innovation-based sectors are projected to bolster export performance.
Labour market pressures eased, unemployment to hover around 4%
Weaker labour demand has been accommodated by lower migration inflows. Moderate employment growth is forecast over the forecast horizon, and the unemployment rate is set to remain around 4%.
Inflation moderates but remains above target
Tight macroeconomic policies contributed to a decline in inflation in 2025. This trend is projected to continue, but inflation is expected to remain above the central bank’s target as domestic demand expands.
Fiscal consolidation resumes gradually
The 2024 deficit widened due to additional spending related to volcanic eruptions. The 2025 budget targets a smaller deficit, and a tight fiscal stance is expected in 2026 and 2027 to reduce public debt and support disinflation.
Source: European Commission. European Economic Forecast, Autumn 2025.
