Furthermore, Icelanders appear to be more inclined to travel these days, and more of them are considering buying a car, according to Gallup’s most recent big-ticket index, also published in December. The quarterly big-ticket index, which is designed to measure Icelanders’ planned major purchases and investments – such as the purchase of overseas trips, motor vehicles, and homes – took a sizeable jump in Q4/2024, reaching its highest since mid-2022. In particular, the component for planned overseas travel rose sharply between measurements, although in addition, more consumers are planning to buy a car now than in previous quarters.

On the other hand, consumers’ interest in buying real estate has shrunk between measurements, after having surged in the autumn, as the chart indicates. As a result, the new sub-index value for home purchases is back to a level close to its average from mid-2021 through mid-2024.

Growing optimism among corporate executives

Just before the holidays, the CBI published the most recent results of Gallup’s corporate expectations survey, which is carried out quarterly at the behest of the CBI and the Confederation of Icelandic Employers. As has been the case with households, upbeat sentiment has rebounded to a significant extent among executives, whether in terms of their assessment of the current situation or their expectations for coming quarters. On both measures, company executives appear more sanguine than in the past 2-3 years.

This last survey contains a number of interesting findings. For instance, respondents are asked whether they consider their businesses short-staffed. In the most recent Gallup survey, 23% of executives answered in the affirmative. This is the smallest share of reported shortages since mid-2021, when the pandemic was raging and, in many cases, kneecapping companies’ operations.

The Gallup survey also measures expected demand for labour. Companies are asked whether they expect to lay off employees, recruit them, or hold their personnel level unchanged in the coming six months. The dispersion of responses can be encapsulated with what we call the employment expectations indicator, expressed as the ratio of positive to negative responses and weighted in much the same way as the Consumer Confidence Index is.

As can be seen in the graph at the right in the chart above, the indicator has fluctuated considerably between measurements in the recent term, although a downward trend can be detected since mid-2022. Unemployment has not shown a comparable trend, however – at any rate, not according to the Statistics Iceland (SI) labour force survey – although it did tick upwards in Q3. Registered unemployment as measured by the Directorate of Labour has inched upwards in the recent past, however.

It is also worth noting that responses differ widely from one sector to another. In the retail/wholesale and manufacturing sectors, for instance, companies planning redundancies outnumber those planning to recruit, but the opposite is true in the construction, fishing, and tourism- and transport-related sectors. Job numbers could therefore rise in export companies and construction firms but decline in sectors closely linked to domestic demand.

On the whole, we interpret these survey results as an indication that demand pressures in the labour market are steadily subsiding at present, but without signalling an upcoming spike in unemployment.

The various causes of rising expectations

What could explain this return to buoyancy among Icelandic households and businesses? A few things come to mind as possible contributors.

• The past few years’ surge in inflation put consumers and companies on the defensive, in Iceland as well as in other countries. So it was no surprise that the long-awaited disinflation episode starting in 2024 should allay some of Icelanders’ worries, as households should find it easier to make ends meet and businesses will be able to control costs more effectively. As the chart below indicates, both groups have grown steadily more hopeful that inflation will lie within reasonable limits in coming quarters.
• Icelanders’ concerns about persistent inflation have centred not least on the effect it has had on interest rates. After the CBI stopped raising rates in spring 2023, the policy rate remained unchanged at 9.25% until Q4/2024. Many observers were doubtless relieved to see the policy rate finally start to fall in early October. By the year-end, it was down by 0.75 percentage points.
• As we have discussed in the past, consumer sentiment often surges during the run-up to Parliamentary elections, when campaign promises bolster expectations of better times ahead. That certainly happened this autumn. On the other hand, we have not yet seen a post-election reversal in sentiment, as we sometimes do. In part, this may be because the coalition Government was formed quickly, although there is limited experience of the new Cabinet.
• And last but not least, the economy appears headed for a relatively soft landing. There have been vociferous discussions recently about the corrosive effect of high interest rates and inflation on households’ and businesses’ financial position, and in some cases the situation has been depicted as being worse than it actually was. As yet, there are few signs that Iceland is headed for widespread unemployment, a cascade of company failures, or general financial distress among households.

The Gallup Consumer Confidence Index correlates quite closely with developments in private consumption, and corporate expectations tend to give a reasonable indication of how business investment will develop in the coming term. As a result, we interpret the above-described surveys as signs that domestic demand will tend to grow rather than shrink in 2025, and that the labour market will be relatively well balanced. This can be called a win, after the volatility that has bedevilled the domestic and global economies thus far in the 2020s.