The effects were unusually pronounced in Q4, as SI’s press release states that investment in the IT and fishing industries were the main catalysts of investment growth. As regards the IT sector, it has already emerged that investment in data centres grew markedly in H2/2024 – investment that relies almost entirely on imported machinery and equipment. The same can be said of the fishing industry, as SI notes that two trawlers were added to Iceland’s fishing fleet in Q4.

Contribution of net trade to GDP growth negative in 2024

The contribution from net trade was markedly negative in 2024, in that domestic demand growth far outpaced GDP growth during the year. In Q4, export growth actually measured 1.4% YoY in real terms, but it was dwarfed by the aforementioned 10.5% growth in imports.

As the chart indicates, services exports are a major determinant of developments in external trade as a whole, and since services exports derive to a large extent from tourism, headwinds in the sector early in 2024 had a strong adverse impact on the balance of external trade. On the other hand, services exports grew by over 3% in Q4, reflecting a quite satisfactory quarter for the tourism industry.

In 2024 as a whole, exports contracted by 1.1%, while imports grew by 2.7% in volume terms. The contraction in exports was due entirely to a 3.9% drop in services exports, as goods exports grew by 1.6%. On the imports side, there were contributions from both goods and services, which grew by 3.2% and 1.8%, respectively, in 2024.

Investment has surged in recent quarters

Investment gained significant ground in 2024 despite high interest rates, increased pessimism among corporate executives early in the year, and a contraction in exports. The discussion above centres on business investment in the fourth quarter of 2024. But investment figures fluctuate widely within any given year. and it is often more useful to examine the year as a whole.

Doing so reveals that investment grew by 7.5% in volume terms in 2024. What is perhaps most surprising here is how resilient residential investment was. According to data from SI, residential investment jumped 18% last year, and notably, figures for the first three quarters were revised significantly upwards.

Furthermore, business investment was quite buoyant in 2024, growing by nearly 7% YoY in volume terms. As in Q4, development in the data centre sector and purchases of ships and aircraft affected business investment figures. For instance, investment in office machinery and equipment (including computer equipment) grew 41% last year, and investment in ships and aircraft surged by 64% over the same period. On the other hand, there was a marked contraction in corporate investment in passenger cars, as both car rental agencies and other companies scaled down their vehicle purchases between years.

There was a marginal contraction in public investment, but SI points out that uncertainty about the data calls public sector investment figures into question.

Continued modest growth in private consumption 

Private consumption accounts for just over half of GDP and therefore carries considerable weight in the national accounts. In Q4, private consumption grew by 0.8% in real terms. In addition, figures for previous quarters were revised upwards, with the result that in Q2, for instance, there was only a marginal contraction. Developments for the full year were therefore very similar to those in 2023. In all, private consumption grew by 0.6% in real terms in 2024, as compared with 0.5% in 2023. In our recently issued macroeconomic forecast, we projected year-2024 private consumption growth at 0.9%, so the actual outcome is rather weaker than we had expected – assuming that the numbers are not revised upwards later on.

Private consumption figures for 2024 align well with developments in payment card turnover, which was brisk against a backdrop of moderate real wage growth, falling interest rates, and lower inflation. Furthermore, sentiment among Icelanders has rebounded recently, according to the Gallup Consumer Confidence Index. Offsetting this is a contraction in households’ purchases of consumer durables such as motor vehicles and large appliances, both of which contracted sharply in 2024. Presumably, this segment of private consumption has considerable upside potential in the coming term and will contribute to more rapid growth further ahead. SI’s press release notes as well that travel-related consumption spending grew in Q4. A constantly growing share of Icelanders’ consumption takes place abroad, as can be seen in 2024 payment card turnover data, although a goodly portion of the increase is due to e-commerce.

A robust economy calls for some monetary restraint

It is safe to say that the newly published figures reflect greater resilience in the domestic economy in 2024 than we – and probably most others as well – had expected. Year-2024 GDP growth measured 0.6%, according to SI’s preliminary figures. In our forecast from end-January, however, we projected a contraction of 0.5%, and the CBI’s most recent forecast provided for a contraction of 0.4%. SI also released revised national accounts data for previous years alongside the newly published figures. Year-2023 GDP growth is now estimated at 5.6% instead of the previous 5.0%. On the other hand, GDP growth in 2021 is now estimated at 5.0%, down from 5.3% in SI’s previous data. The year-2023 revision carries greater weight in an assessment of the current state of the economy, however, as it is both larger and more recent.

In our macroeconomic forecast from end-January, we projected that GDP growth would gather pace steadily over the next three years. According to that forecast, output growth will measure 2.2% this year, 2.5% in 2026, and 2.6% in 2027. It could therefore be that the next upswing in the economy will take place without an intervening full-year contraction. If so, this would represent a very soft landing indeed after the 2021-2023 boom, but by the same token, the likelihood that a slack in the economy will warrant a significant reduction in real interest rates grows correspondingly slimmer.

The MPC will pay close attention to the newly published figures during its deliberations on the upcoming interest rate decision, to be announced on 19 March. Given that SI’s figures suggest that the economy has been more robust in the past two years than the CBI previously estimated, the new numbers will probably add weight to the argument that the monetary stance should be tighter than it would be otherwise. In our estimation, the prospect of a 50-point policy rate cut has dimmed and the likelihood of a 25-point rate cut has grown commensurably stronger. Our preliminary forecast of two consecutive 25-point rate reductions, one in March and the other in May, therefore stands unchanged.