Economic Outline

Economic Indicators

In the last decade, Iceland's economy grew at a relatively fast pace, driven by unprecedented growth in tourism, strong consumption, and falling unemployment. The results for the year 2023 show that gross domestic production increased by 4.1% in volume, with a nominal level estimated at ISK 4,279 billion. The primary catalyst for economic growth was the 9.8% year-over-year rise in service exports, bolstered by improvements in the trade balance and heightened consumption. Gross domestic final expenditure, encompassing household and government consumption as well as gross fixed capital formation, is estimated to have increased by 1.2% in volume last year (Statistics Iceland). For 2024, the IMF projects growth at 1.7% of GDP, with a robust recovery of the tourism sector partly offsetting the cooling domestic economy, followed by 2.2% in 2025.

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 6% of GDP), making it vulnerable to external shocks. Moreover, domestic shocks, such as a bad fishing season or a decline in viable fishing stocks, could reduce exports of marine products (which account for around 40% of merchandise exports). In June 2023, the Icelandic government unveiled fresh measures to combat inflation, implementing a stricter fiscal approach to bolster the Central Bank of Iceland's endeavors to reduce inflation, aligning with its recently released Fiscal Plan (2024-2028). The budget deficit was estimated at 2.1% of GDP in 2023 by the IMF, with an expected reduction this year (1.7%). The Minister of Finance expressed the aim to achieve a balanced budget by 2025, although specifics regarding the approach to attain this goal remain unclear. Iceland's general government debt ratio has experienced a notable decrease since its peak at 77.5% of GDP in 2020, propelled by strong nominal GDP growth and the utilization of accumulated cash deposits to address upcoming maturities. Fitch estimated the debt to have fallen to 61.6% of GDP in 2023. However, for the period spanning 2024-2027, a more moderate pace of debt reduction is anticipated, with projections indicating a decline to 58.1% of GDP, gradually moderating to 55.9% by 2027 (Fitch Ratings). Headline inflation, which stood at 6.6% in February 2024, has shown a steady decline from its peak of 10.2% in February 2023, yet it remains significantly above the inflation target of 2.5%. Elevated short and long-term inflation expectations also present a risk to ongoing wage negotiations. According to the latest forecast, the Central Bank of Iceland (CBI) does not anticipate inflation to align with its target until the second half of 2026.

The labor market has improved significantly in the last years, and unemployment decreased at the same time as the working-age population increased (also thanks to the inflow of Ukrainian refugees). In 2023, the unemployment rate was estimated at 3.4% according to the national statistical institute and should increase slightly over the forecast horizon. Overall, Iceland has a high standard of living, one of the highest GDP per capita in Europe (estimated at USD 69,615 in 2022 by the World Bank), and one of the lowest poverty rates. Nevertheless, Iceland is among the countries with the most people living abroad and will have to import thousands of foreign workers to meet the needs of businesses.

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