Iceland

Recovery in key sectors supports growth in 2025

Iceland’s economic outlook for 2025 is shaped by a gradual easing of inflationary pressures and a recovery in key sectors. While inflation remains elevated, it is expected to decline slowly, allowing the central bank to begin lowering interest rates. This monetary easing will provide much-needed support to household consumption, which has been constrained by high borrowing costs. Economic activity is set to pick up after a challenging 2024, which was impacted by the weak fish catch, and the tourism disruption caused by volcanic eruptions. Both the fishing industry and tourism sector are expected to rebound, contributing to stronger overall growth. A resurgence in visitor numbers, combined with a recovering domestic market, will help drive demand across multiple sectors.

Public spending growth in 2025 is expected to be slow with public investments to fall for the third consecutive year. The government remains committed to narrowing the deficit and mitigating inflationary risks. The slowdown in government spending and investment may temper growth in some areas, but Iceland’s economy should remain resilient, with improving private sector activity and recovering exports providing a foundation for a stronger year ahead.

Better balances in 2025

In 2025, Iceland’s current account balance is expected to remain relatively stable, with the potential for a slightly higher surplus. This is primarily driven by stronger exports of fish and aluminium, which should help offset continued external uncertainties. While the goods trade deficit remains a challenge, improved export performance is expected to provide some relief. The balance of services, bolstered by a steady tourism sector, should continue to contribute positively to the overall current account position.

Iceland's public finances are set to improve in 2025, with the government aiming to narrow the deficit by limiting spending growth and higher tax revenue. Following an increase in debt levels – partly due to financial support provided in the aftermath of the volcanic eruption – public debt is now expected to decline slightly as a share of GDP.

New government is looking at an EU referendum

The snap election in November 2024 saw the sitting centre-right government losing its majority (after disagreements around immigration and cost-of-living) with the Social Democratic Alliance becoming the biggest party and forming a coalition government with Viðreisn (liberals), and the People’s Party (centre-left). The presidential election in June 2024 resulted in the independent Halla Tómasdóttir, previously a chief executive of a global NGO, becoming the president.

The new government is planning to have a referendum on accession into the European Union by 2027 with recent polls on the matter indicating a majority in favour of joining the EU. Iceland is sensitive to changes in sentiment in the US due to around 20-25% of tourism being from the US while exports make up around 10%. However, US' share of aluminium exports are smaller.

Last updated: March 2025