FX.co ★ Iceland Economy Shrinks 0.6% in Q4

Iceland’s economy contracted by 0.6% year-on-year in Q4 2025, following an upwardly revised 3.2% expansion in the previous quarter. Gross fixed capital formation fell sharply, swinging to a 12.5% decline from a 5.7% increase, driven by a steep drop in business investment (-15.3% vs. +16.4%) and a deeper contraction in residential construction (-15.6% vs. -10.3%). At the same time, changes in inventories were flat, compared with a 1.8% contribution in Q3.

Net exports also weighed on GDP. Overall exports declined 5%, as services exports fell 4.3% after rising 7.2% in the previous quarter, and goods exports dropped 13.3% following a 3.8% increase. In contrast, domestic demand provided some support: private consumption grew 5.5%, up from 4.7%, while government consumption inched up 1.1% from 1.0%.

On a seasonally adjusted quarter-on-quarter basis, GDP decreased by 0.8%, compared with an upwardly revised 1.3% growth in Q3. For the full year 2025, Iceland’s economy expanded by 1.3%, reversing a 1.3% contraction in the previous year.