Economic Outline

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.

In the last decade, Iceland's economy grew at a relatively fast pace, driven by unprecedented growth in tourism, strong consumption and falling unemployment. In 2022, the country benefitted from rising exports of energy-intensive products (such as aluminium) and the recovery of the tourism sector (which was severely affected by the COVID-19 pandemic and the restrictions that followed), recording an estimated GDP growth of 5.1% according to the IMF (6.2% as per Statistics Iceland). Private consumption was also strong, but it is expected to slow down in 2023 as wage growth moderates; similarly, tight financial conditions should hamper public and private investment, resulting in a growth rate of 2.9% this year and 2.6% in 2024 (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 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 35% of merchandise exports). Revenue growth and the phasing out of the majority of pandemic-related support measures counterbalanced the increases in social benefits and pensions in 2022, resulting in a general government budget deficit of 6.8% of GDP. For 2023 and 2024, the IMF forecasts a gradual reduction of the deficit, to 4.3% and 3% of GDP, respectively. Despite the large deficit, the government debt ratio declined to 68.2% of GDP in 2022 (from 74.6% one year earlier), underpinned by nominal GDP growth and proceeds from asset sales. Overall, the country has high financing flexibility due to the extremely large pool of private pension funds' assets (194% of GDP, 65% of which is invested domestically), easy access to the international bond market, and a large cash deposit buffer (Fitch Ratings). The IMF projects a decline in the debt-to-GDP ratio this year (63.1%) and in 2024 (60%). Inflation picked up to 8.4% in 2022, driven by an uptick in house prices and imported goods, while high global energy prices had a smaller impact on the national inflation due to the fact that geothermal and hydropower cover around 90% of the country’s energy demand. 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, but it definitively withdrew its candidacy in March 2015.

The labour market has improved significantly in the last two years and unemployment decreased at the same time as the working-age population increased (also thanks to the inflow of Ukranian refugees). In 2022, the unemployment rate was estimated at 3.8% according to the national statistical institute and should remain stable over the forecast horizon. Overall, Iceland has a high standard of living, one of the highest GDP per capita in Europe (estimated at USD 66,467 in 2022 by the IMF), and one of the lowest poverty rates (4.9% as of 2021 – data Iceland Monitor). 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. Furthermore, real wages have started to decline in the wake of high inflation and most public contracts expire in March 2023, with considerable uncertainty about the results of collective agreements in the labour market.

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