Iceland Economy Shrinks 1.9% in Q2

Iceland’s economy expanded by 1.2% year-on-year in Q3 2025, rebounding from a revised 0.2% contraction in the previous three-month period. The main contributor to growth was household final consumption, which grew 4.2%, mainly on the back of increased spending on service-related goods. At the same time, gross fixed capital formation and government consumption rose 2.2% and 0.9%, respectively. Meanwhile, net external demand had an estimated negative contribution of 4.5% to growth, reflecting a widening trade deficit with exports up 2.6% and imports climbing 13.5%. On a seasonally adjusted quarterly basis, the GDP shrank by 0.2% in Q3, after a revised 0.4% decline in the prior period.

Iceland’s economy contracted by 1.9% year-on-year in the second quarter of 2025, following an upwardly revised 2.7% rise in the previous quarter. This marked the lowest reading since the fourth quarter of 2020 as decreases were seen in fixed investments (8.3% vs 18.4% in Q1) and government spending (0.3% vs 2.3%). Net external demand also contributed negatively to the GDP, as exports fell (-0.2% vs 4.6%), while imports moderated (13.4% vs 13.7%). Meanwhile, household consumption increased by 3.1% from 2.8% in the previous quarter. On a seasonally adjusted quarterly basis, the GDP shrank by 0.7% in Q2, reversing an upwardly revised 2.9% gain in the preceding quarter.

Iceland’s economy expanded by 2.6% year-on-year in the first quarter of 2025, following a downwardly revised 0.8% contraction in the previous quarter. This marked the fastest expansion since the third quarter of 2023. Growth was driven by a surge in fixed investments (18.0% vs 15.6% in Q4), household consumption (2.3% vs 0.8%), and government spending (2.6% vs 2.1%). Net external demand also contributed positively to the GDP, as exports (13.5% vs. 10.5%) rose more than imports (4.4% vs 1.4%). On a seasonally adjusted quarterly basis, GDP rose by 2.7% in the March quarter, rebounding from a 1.4% fall in the preceding period.