Iceland

Growth supported by domestic demand and tourism

Iceland's economy is expanding moderately in 2026 and should continue to do so into 2027, supported by resilient household consumption, rising exports and strong public investment. Economic growth accelerated in the first quarter of 2026, driven largely by an improved trade balance and stronger-than-expected tourism activity. While high inflation continues to weigh on consumer confidence, a resilient labour market and rising public investment in infrastructure, technology and renewable energy should help sustain domestic demand.

Inflation remains the main challenge facing the economy. Price pressures have proven more persistent than expected, driven by higher housing, transport and food costs, prompting the Central Bank of Iceland to maintain a relatively restrictive monetary stance. As a result, interest rates are likely to remain elevated until clearer evidence emerges that inflation is moving sustainably towards target. Nevertheless, inflation is expected to ease gradually during 2027, supporting household purchasing power and allowing monetary policy to become less restrictive. Business investment is softening in 2026 amid weaker confidence and higher financing costs, although this is partly offset by continued growth in public-sector investment.

External demand remains broadly supportive. Tourism, fisheries, aquaculture and aluminium production continue to underpin exports, while Iceland's abundant renewable energy resources help maintain the competitiveness of energy-intensive industries. Visitor arrivals have remained strong during 2026, although higher travel costs globally could moderate growth in the sector. The fisheries industry faces some headwinds from lower mackerel quotas, while aluminium exports have recovered following production disruptions in late 2025. Overall, exports are expected to contribute positively to growth in 2026 and 2027, supported by Iceland's extensive trade links with Europe, the United Kingdom, the United States and other key markets.

External deficit remains a weakness despite improving public finances

Iceland's current account is expected to remain in deficit through 2026 and 2027, reflecting strong import demand, fluctuations in tourism revenues and the relatively small and concentrated nature of the export base. While export growth and moderating imports should improve the external balance compared with recent years, Iceland remains more vulnerable to shifts in global demand and commodity markets than many other Nordic economies.

Public finances, however, continue to improve. Government debt is expected to decline gradually over the forecast period as economic growth supports revenues and fiscal consolidation efforts continue. Although government spending remains elevated, with a focus on healthcare, infrastructure, education and innovation, public debt is projected to trend lower in both 2026 and 2027. Compared with many advanced economies, Iceland's fiscal position remains sound, providing policymakers with flexibility to respond to economic shocks if necessary.

Le gouvernement donne la priorité à la stabilité budgétaire, au logement et au débat sur l'Europe

Iceland's political environment remains stable following the formation of the coalition government led by Prime Minister Kristrún Frostadóttir after the December 2024 election. The government brings together the Social Democratic Alliance, the Reform Party (Viðreisn) and the People's Party, providing a parliamentary majority and a relatively stable platform for policymaking. The coalition's priorities include improving housing affordability, strengthening public services, supporting economic stability and accelerating investment in infrastructure, innovation and the green transition. The next parliamentary election must be held by November 2028.

A key political event in 2026 will be the referendum scheduled for August on whether Iceland should resume negotiations on European Union membership. While the vote concerns reopening accession talks rather than joining the EU itself, it is expected to shape the country's long-term relationship with Europe and could have implications for trade, fisheries and regulatory alignment. The issue remains politically sensitive, particularly given previous disagreements over fisheries policy during earlier accession discussions. Alongside the European debate, the government remains focused on reducing inflation, easing cost-of-living pressures and maintaining a sustainable fiscal position. Climate policy also remains high on the agenda, with the coalition committed to achieving carbon neutrality by 2040 while safeguarding the competitiveness of key export industries.

Last updated: July 2025