Iceland: Economic and Political Overview
In this page: Economic Indicators | Foreign Trade in Figures | Sources of General Economic Information | Political Outline | COVID-19 Country Response
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.
| Main Indicators | 2022 | 2023 (E) | 2024 (E) | 2025 (E) | 2026 (E) |
|---|---|---|---|---|---|
| GDP (billions USD) | 28.70 | 31.02 | 33.34 | 35.80 | 38.56 |
| GDP (Constant Prices, Annual % Change) | 8.9 | 4.1 | 1.7 | 2.0 | 2.2 |
| GDP per Capita (USD) | 76,284 | 79,998 | 84,594 | 89,380 | 94,704 |
| General Government Balance (in % of GDP) | -5.4 | -3.5 | -2.9 | -2.1 | -1.5 |
| General Government Gross Debt (in % of GDP) | 67.4 | 64.8 | 58.7 | 56.2 | 53.5 |
| Inflation Rate (%) | 8.3 | 8.7 | 5.6 | 3.4 | 2.5 |
| Unemployment Rate (% of the Labour Force) | 3.8 | 3.4 | 3.8 | 4.1 | 4.1 |
| Current Account (billions USD) | -0.48 | 0.30 | 0.32 | 0.28 | 0.45 |
| Current Account (in % of GDP) | -1.7 | 1.0 | 1.0 | 0.8 | 1.2 |
Source: IMF – World Economic Outlook Database , Latest available data
Note: (e) Estimated Data
Iceland has a labor force of more than 231,000 people out of a population of 372,000. The Icelandic labor market is characterized by a high participation rate and a high proportion of trade union membership, at above 90%. 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. Nowadays, 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, while 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. According to data by Statistics Iceland, in 2023, cereal production stood at 6,679 tonnes (-17.8% y-o-y).
The industrial sector represents almost 20.8% of GDP and employs 18% of the workforce. The hydroelectric potential stimulates the production of aluminum and 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 11% of GDP, whereas the construction industry accounted for 7.1% of GDP in 2022 (Statistics Iceland, latest data available).
Services account for 64.5% of GDP and employ 78% 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 specializing in computers and software. There are also many call centers in the country. The tourism sector has been recovering after the COVID-19 pandemic, and in 2023 the country recorded nearly 10 million overnight stays, marking a 16% increase year-on-year. Overall, the direct contribution of tourism to the national GDP was estimated at 6.1% in 2022 by Statistics Iceland (it was 8.1% before the pandemic). Real estate activities accounted for 11% of GDP, wholesale for 9.7%, and human health and social work activities for 9% (Statistics Iceland). The commercial banking sector consists of four universal banks and five small savings banks, with the government holding the majority in two of the three major banks. The total assets of the banking sector amounted to almost ISK 4,700 billion in 2021, equivalent to around 145% of GDP (European Banking Federation - latest data available).
| Breakdown of Economic Activity By Sector | Agriculture | Industry | Services |
|---|---|---|---|
| Employment By Sector (in % of Total Employment) | 4.0 | 18.8 | 77.1 |
| Value Added (in % of GDP) | 4.1 | 21.3 | 64.4 |
| Value Added (Annual % Change) | -0.7 | 3.6 | 7.8 |
Source: World Bank - Latest available data.
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| Monetary Indicators | 2016 | 2017 | 2018 | 2019 | 2020 |
|---|---|---|---|---|---|
| Iceland Crown (ISK) - Average Annual Exchange Rate For 1 MUR | 3.40 | 3.10 | 3.19 | 3.45 | 3.44 |
Source: World Bank - Latest available data.
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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.
Economic freedom in the world (interactive map)
Source: Index of Economic Freedom, Heritage Foundation
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Iceland has always been open to international trade, with trade representing 94% of its GDP (World Bank). Most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency for both businesses and households were lifted to stimulate foreign trade. However, barriers to trade and market entry still exist, including the adoption of EU product standards and regulations, high tariffs on most agricultural products from outside the EU, restrictions on the import of certain products like raw meat due to phytosanitary regulations, and difficulty in obtaining financing for joint ventures. Traditional sectors like fishing drive the dynamism of the country's exports, with more than 40% of national exports consisting of fishing products. Additionally, Iceland exports aluminum and ferrosilicon (around one-third of total exports), as well as dairy products. Major imports include petroleum oils, motor cars, artificial corundum, and carbon electrodes.
According to data from Statistics Iceland, in 2022, the country’s main export destinations were the Netherlands (37.5% of total exports), the United Kingdom (9%), the U.S. (7.8%), Germany (6.5%), and France (6.4%). Imports primarily originated from Norway (12.3%), China (9.4%), Germany (8.3%), the Netherlands (7.1%), the U.S. (6.3%), and Denmark (6%). Overall, the European Union absorbs more than two-thirds of Icelandic exports and supplies around half of the total imports, as Iceland is a member of the European Economic Area (EEA).
In 2022, Iceland exported USD 7.3 billion worth of merchandise (a 23.4% increase year-on-year) and imported USD 9.6 billion (a 22.6% increase). However, Iceland is a net service exporter, with USD 5.4 billion in exports compared to USD 4 billion in imports in 2022 (data from the WTO). Despite this, the overall external balance for goods and services was negative by 1.8% of GDP in 2022 (World Bank data). According to the latest figures from Statistics Iceland for the year 2023, the total value of exported goods was ISK 913.9 billion, or ISK 90.4 billion lower (a 9% decrease) than during the previous 12 months at current exchange rates. Manufacturing products contributed 54% of the total exports, with their value decreasing by 13%. Marine products contributed 37% of total exported goods, with their value decreasing by 4% compared to the previous 12 months.
| Foreign Trade Indicators | 2019 | 2020 | 2021 | 2022 | 2023 |
|---|---|---|---|---|---|
| Imports of Goods (million USD) | 6,567 | 5,697 | 7,817 | 9,591 | 9,464 |
| Exports of Goods (million USD) | 5,223 | 4,582 | 5,987 | 7,389 | 6,609 |
| Imports of Services (million USD) | 3,558 | 2,201 | 2,902 | 4,152 | 4,523 |
| Exports of Services (million USD) | 5,683 | 2,505 | 3,505 | 5,584 | 6,662 |
| Imports of Goods and Services (Annual % Change) | -9.1 | -20.6 | 19.9 | 19.7 | n/a |
| Exports of Goods and Services (Annual % Change) | -5.5 | -31.1 | 14.7 | 20.6 | n/a |
| Imports of Goods and Services (in % of GDP) | 39.2 | 34.8 | 39.4 | 47.0 | n/a |
| Exports of Goods and Services (in % of GDP) | 43.7 | 33.2 | 37.4 | 46.3 | n/a |
| Trade Balance (million USD) | -838 | -626 | -1,113 | -1,534 | n/a |
| Trade Balance (Including Service) (million USD) | 1,125 | -321 | -511 | -102 | n/a |
| Foreign Trade (in % of GDP) | 82.9 | 68.0 | 76.8 | 93.4 | n/a |
Source: WTO – World Trade Organisation ; World Bank , Latest Available Data
| Main Customers (% of Exports) |
2023 |
|---|---|
| Netherlands | 36.4% |
| United States | 10.0% |
| United Kingdom | 8.8% |
| France | 6.5% |
| Norway | 5.9% |
| See More Countries | 32.4% |
| Main Suppliers (% of Imports) |
2023 |
|---|---|
| Norway | 11.5% |
| Germany | 8.8% |
| China | 8.7% |
| Netherlands | 7.7% |
| United States | 7.6% |
| See More Countries | 55.7% |
Source: Comtrade, Latest Available Data
Source: Comtrade, Latest Available Data
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| 5.4 bn USD of services exported in 2022 | |
|---|---|
| 45.31% | |
| 30.75% | |
| 9.55% | |
| 8.64% | |
| 2.04% | |
| 1.52% | |
| 0.76% | |
| 0.70% | |
| 0.40% | |
| 0.35% | |
| 3.9 bn USD of services imported in 2022 | |
|---|---|
| 38.43% | |
| 20.52% | |
| 19.11% | |
| 10.28% | |
| 5.09% | |
| 2.18% | |
| 1.93% | |
| 1.45% | |
| 0.56% | |
| 0.46% | |
Source: United Nations Statistics Division, Latest Available Data
The Prime Minister is the head of the government and holds the executive powers which include implementation of the law in the country and running the day-to-day affairs. The Prime Minister also appoints the Cabinet.
The world rankings, published annually, measures violations of press freedom worldwide. It reflects the degree of freedom enjoyed by journalists, the media and digital citizens of each country and the means used by states to respect and uphold this freedom. Finally, a note and a position are assigned to each country. To compile this index, Reporters Without Borders (RWB) prepared a questionnaire incorporating the main criteria (44 in total) to assess the situation of press freedom in a given country. This questionnaire was sent to partner organisations,150 RWB correspondents, journalists, researchers, jurists and human rights activists. It includes every kind of direct attacks against journalists and digital citizens (murders, imprisonment, assault, threats, etc.) or against the media (censorship, confiscation, searches and harassment etc.).
The Indicator of Political Freedom provides an annual evaluation of the state of freedom in a country as experienced by individuals. The survey measures freedom according to two broad categories: political rights and civil liberties. The ratings process is based on a checklist of 10 political rights questions (on Electoral Process, Political Pluralism and Participation, Functioning of Government) and 15 civil liberties questions (on Freedom of Expression, Belief, Associational and Organizational Rights, Rule of Law, Personal Autonomy and Individual Rights). Scores are awarded to each of these questions on a scale of 0 to 4, where a score of 0 represents the smallest degree and 4 the greatest degree of rights or liberties present. The total score awarded to the political rights and civil liberties checklist determines the political rights and civil liberties rating. Each rating of 1 through 7, with 1 representing the highest and 7 the lowest level of freedom, corresponds to a range of total scores.
Political freedom in the world (interactive map)
Source: Freedom in the World Report, Freedom House
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Latest Update: April 2024
