After a surge in 2021-2022, GDP growth lost steam over the course of 2023. The failed capelin catch was a major factor, but there were headwinds in other exports, and private consumption shrank as well. We forecast year-2024 output growth at 0.3%. This year marks a turning point in the business cycle, although a full-year contraction is unlikely.
The outlook is for output growth to measure 1.2% in 2025, as private consumption and exports will gain steam, although investment looks set to be virtually unchanged YoY. The outlook is for growth to pick up to 2.5% in 2026, owing not least to a rise in business investment as interest rates fall and to faster real wage growth in a lower-inflation environment.
With stagnant growth in tourism and a marginal downturn in exports of fish and aluminium this year, the current account is expected to show a temporary deficit. In 2025 and 2026, though, we expect modest growth in exports of both goods and services, driven by an increase in farmed fish exports, a stronger groundfish catch, a more muted impact on aluminium exports from cutbacks in energy supplies, and increased exports of pharmaceuticals and high-tech products. We therefore project that the current account balance will be negative by 1.1% of GDP this year and then rebalance in 2025 and 2026. Improvements in the current account and investment-related inflows will support the exchange rate over the forecast horizon, and the outlook is for the ISK to be 2% stronger at the end of the period than at the end of August 2024.
The road to the inflation target has been ridden with potholes, but inflation has fallen noticeably in 2024 to date and looks set to plunge later in the forecast horizon. The disinflation process will be supported in particular by more stable prices abroad, reduced demand pressures, and modest wage agreements. Inflation will average 6% in 2024 and ease to 3% over the forecast period. It looks set to fall below the upper tolerance limit of the inflation target in coming quarters.
Stubborn inflation and a resilient economy have delayed policy rate cuts, but a gradual monetary easing phase could begin as soon as Q4/2024. This easing will probably end with a policy rate of roughly 5.5%, which we think is close to equilibrium at present.
