The economic context of Iceland

Economic Indicators

For the latest updates on the key economic responses from governments to address the economic impact of the COVID-19 pandemic, please consult the IMF's policy tracking platform Policy Responses to COVID-19.

After having suffered from the international crisis, Iceland's economy recovered, also thanks to a USD 2 billion loan granted from the IMF to stabilise the exchange rate of the Icelandic krona and to restore confidence, driven by unprecedented growth in tourism, strong consumption and falling unemployment. In 2021, an early opening of the economy contributed to a rebound in GDP (estimated at +3.7% by the IMF) after the recession experienced following the outbreak of the Covid-19 pandemic one year earlier). Growing wages contributed to an increase in private consumption, whereas tourism recovered only partially. The economy is projected to grow by 4.1% in 2022 and 3.7% in 2023, driven by rebounding foreign tourism and robust goods exports. Business investment is expected to ease as pent-up projects are being terminated, while household consumption should remain solid (IMF).

Iceland's economic outlook is very volatile, as the country is heavily dependent on the tourism sector (which accounts for 40% of export income and around 10% of GDP), making it vulnerable to external shocks. This is why, following the Covid-19 pandemic, the Icelandic economy came to a standstill. The effects of the crisis are clearly visible. Public debt has risen to 75.8% of GDP in 2021 (from a pre-pandemic level of 66.1%) but is expected to decrease marginally in 2022 (75.4%) and 2023 (73.9%). The public deficit stood at an estimated 3.5% of GDP in 2021 and is expected to peak at -6.2% this year, before easing in 2023 (-3.9% - IMF). Between May and November 2021 the Central Bank tightened its monetary policy, raising the interest rate in four steps, from 0.75% to 2%. Despite such measures, inflation spiked to 4.3% in 2021. While the inflationary pressure should diminish somewhat in 2022, the level of inflation will remain elevated and noticeable (at around 3.5%), before returning to the Central Bank’s inflation target of 2.5% in 2023. Iceland is a member of the European Free Trade Association (EFTA) and is also part of the European Economic Area (EEA). To benefit from European aid and the 'umbrella' constituted by the euro, Iceland had applied to join the European Union. Nevertheless, it definitively withdrew its candidacy in March 2015.

Iceland's unemployment rate increased exponentially to 7% in 2021 despite hiring subsidies, from 3.9% in 2019, due to the negative economic impact of the COVID-19 pandemic. The IMF expects the rate to decrease to 5% this year and 4% in 2023, although the rate will remain very dependent on the development of tourism (which represents almost one-fourth of total employment). Overall, Iceland has a high standard of living, one of the highest GDP per capita in Europe (estimated at USD 58,151 in 2021 by the IMF), and one of the lowest poverty rates in the world (4.9% as of 2021 – data Iceland Monitor). Nevertheless, Iceland is among the countries with most people living abroad and will have to import thousands of foreign workers to meet the needs of businesses.

Main Sectors of Industry

Iceland has a labour force of more than 213,000 people out of a population of 366,000. The Icelandic labour market is characterised by a high participation rate and a high proportion of trade union membership, at around 92.2% (OECD). Since the financial crisis in 2008, one of the government’s priorities has been to diversify the economy, which in the last decade was mainly oriented towards the manufacturing and service industries. The agricultural sector contributes around 4.3% of Iceland's GDP and employs 4% of the workforce. Large areas of sheep pasture are among the most important agricultural resources in the country. The main agricultural products are potatoes, carrots, green vegetables, tomatoes, cucumbers, mutton, chicken, pork, beef and dairy products. The Icelandic economy relies partly on its renewable natural resources and related industries: deep sea fishing, hydraulic and geothermal power and pastures. Fishing is one of the pillars of Iceland’s economy and covers around 40% of exports.

The industrial sector represents almost 19.7% of GDP and employs 17.5% of the workforce. The hydroelectric potential stimulates the production of aluminium, which is the primary resource for export and concentrates around 70% of the electricity produced on the island. Geothermal provides the remaining 30% so that renewable energies cover all of the country’s energy needs. The food processing sector is also important. The manufacturing sector alone accounts for 8.7% of GDP (World Bank).

Services account for 66.2% of GDP and employ 68.5% of the workforce. For the past several years, Iceland's economy has grown thanks to the services sector, particularly within the fields of tourism, software production and biotechnology. In fact, Iceland has become the rear-base of several companies specialising in computers and software. There are also many call centres in the country. Total assets of the banking sector amount to ISK 4,212 billion, the equivalent to around 140% of GDP in 2020 (latest data available). Due to the Covid-19 pandemic and restrictions on international travel, the tourism sector has suffered a major shock: in 2021, the number of foreign tourists stood at 700,000, compared to a pre-crisis level of around 2 million.

 

Breakdown of Economic Activity By Sector	Agriculture	Industry	Services
Employment By Sector (in % of Total Employment)	4.0	17.5	78.5
Value Added (in % of GDP)	4.5	20.4	64.6
Value Added (Annual % Change)	2.0	5.6	4.2

Source: World Bank, Latest Available Data. Because of rounding, the sum of the percentages may be smaller/greater than 100%.

 

Find more information about your business sector on our service Market reports.

 

 

Find out all the exchange rates daily on our service International currency converter.

 

Indicator of Economic Freedom

Definition

Definition:

The Economic freedom index measure ten components of economic freedom, grouped into four broad categories or pillars of economic freedom: Rule of Law (property rights, freedom from corruption); Limited Government (fiscal freedom, government spending); Regulatory Efficiency (business freedom, labour freedom, monetary freedom); and Open Markets (trade freedom, investment freedom, financial freedom). Each of the freedoms within these four broad categories is individually scored on a scale of 0 to 100. A country’s overall economic freedom score is a simple average of its scores on the 10 individual freedoms.}}

Score:

77,4/100

World Rank:

11

Regional Rank:

6

Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation

 

 

Sources of General Economic Information

Ministries

Ministry of Finance
Ministry of Foreign Affairs

Statistical Office

Statistics Iceland

Central Bank

Central Bank of Iceland

Stock Exchange

Nordic Exchange

Economic Portals

Portal to the world: Iceland page