Monetary Bulletin 2026/3

Trading partner GDP growth averaged 1.6% in Q1, and economic activity appears to have held its ground so far this summer. The global GDP growth outlook is broadly unchanged since the spring, and growth for 2026 as a whole is projected at 1.5%. Trading partner inflation surged in the wake of the spike in oil and commodity prices due to the war in the Middle East, but the effects are still expected to be largely temporary.

In Iceland, GDP grew by 2.7% in Q1/2026, in line with the forecast in the May Monetary Bulletin. GDP growth in Q2 is estimated to have fallen short of the level projected in May, as private consumption appears to have softened more than expected. The outlook is also for reduced marine product exports in 2026, offset by stronger export revenues in the data centre sector. GDP growth is now forecast at 1.4% this year, about 0.2 percentage points below the May forecast. It is expected to pick up to 1.9% in 2027 and 2.6% in 2028.

Most indicators suggest that the domestic labour market has continued to soften. The number of wage-earners has increased slightly year-on-year, but the ratio of job vacancies to unemployed persons has continued to decline and unemployment has inched upwards. Employment prospects are weak over the next six months, but the forecast assumes that both employment and total hours worked will increase over the next two years. According to the forecast, the slack in the economy will measure just under 1% of potential GDP in 2026 and then narrow as the forecast horizon advances.

Inflation averaged 5.2% in Q2/2026, whereas in May it was forecast at 5%. It crept upwards in July, to 5.3%. On the other hand, underlying inflation has remained around 4.2% since the spring. Market agents’ and corporate executives’ short-term inflation expectations measure 3.5-4%, while households expect inflation to be more persistent. Due to a higher initial position, inflation is expected to be somewhat higher in 2026 than in the May forecast, but underlying inflation developments are not assumed to have changed much. Inflation is still expected to decline rather rapidly as 2027 advances and return to target in H1/2028.

Global economic uncertainty remains pronounced, and to a large extent, developments will depend on how the wars in the Middle East and Ukraine play out. There is also ongoing uncertainty about how the trade war between the US and other countries will develop. Prospects for the domestic labour market are uncertain as well, as the review clause in wage agreements will most likely be triggered at the end of August. If second-round effects of the oil and commodity price shock prove stronger than they have thus far, inflation could turn out more persistent than it would otherwise. On the other hand, a growing slack in the domestic economy could lead to more rapid disinflation in the latter half of the forecast horizon.