Iceland’s economy is set to slow down after a period of strong growth, according to Ásgeir Jónsson, Governor of the Central Bank of Iceland. As reported by RÚV, Jónsson highlighted that the rapid growth seen in recent years is coming to an end, with the economy now facing a “cooling down” period. While inflation is expected to ease as a result, the overall economic situation will worsen.
The Central Bank’s latest Monetary Bulletin shows that Iceland’s economic growth was just 0.3% in the first half of this year, far below the forecasted figures from August. The outlook for 2024 has also deteriorated, with challenges in export sectors impacting the forecast.
“There has naturally been a great boom in Iceland, we have seen an increase in exports, economic growth, and investment, but it is starting to slow down,” Jónsson said.
Slower Growth and Cooling Inflation 
Stacks of Icelandic Króna. Photo: Golli.
Although inflation has been falling faster than expected, it remains above the Central Bank’s target. Inflation was 4.3% in October, a slight rise from July, but forecasts suggest it will decrease to 3.5% by mid-2024 and 2.5% by early 2027.
The Central Bank has recently lowered the key interest rate to 7.25%, the first reduction since May. However, Jónsson warned that while cooling inflation is positive, it would result in “worse conditions for the people” in Iceland. The Central Bank’s growth forecast for this year is much more pessimistic than that of Statistics Iceland, predicting just 0.9% growth compared to 1.7% in the official forecast.
Iceland’s economy contracted by 1% in 2022, marking the first recession since the Covid-19 pandemic.