Iceland’s economy contracted by 1.1% year-on-year in the second quarter of 2026, reversing an upwardly revised 3.8% expansion in the first quarter. The downturn was driven mainly by weaker net trade in goods. Exports fell 7.3%, compared with a 0.7% increase in Q1, as services exports declined by 1.1% (after rising 5.7% previously) and goods exports dropped more sharply, by 13.8% (vs -3.5% in Q1).
At the same time, imports returned to growth, rising 0.2% after a 9.3% decline in the previous quarter. This rebound was supported by a 1.4% increase in goods imports (vs -13.9% in Q1), which more than offset a steeper fall in services imports of 2.0% (vs -1.0%).
Domestic demand showed mixed dynamics. Private consumption growth slowed to 0.8% from 1.7% in Q1, and the contribution from inventory changes deteriorated, with inventories falling to -0.8% from 1.5%. In contrast, gross fixed capital formation recovered strongly, surging 5.7% after a 10.4% decline in the previous quarter.
On a seasonally adjusted quarter-on-quarter basis, GDP shrank by 3.0% in Q2, following robust growth of 3.7% in Q1.
