Iceland Merchandise Trade Balance (EUR bn)

Annual economic growth more than halved to 3.1% in the final quarter of 2022 from 7.5% in the prior quarter. The slowdown was largely due to private consumption growth tapping on the breaks amid elevated price pressures. However, a robust labor market largely prevented a sharper deceleration. Public spending and fixed investment growth also slowed in Q4 from the prior three months, while the external sector lost notable steam: The rate of growth in exports of goods and services more than halved in October–December. More positively, underlying momentum strengthened at a more robust sequential pace of 2.2% in Q4 (Q3: +0.2% s.a. qoq). The dynamics in Q1 2023 are likely challenging. Price pressures intensified through February, and the Central Bank responded by accelerating the pace of monetary policy tightening, delivering a cumulative 150 basis points of rate increases in February and March.