Icelandic Economy Q3 2022

The report includes economic developments in recent months, short term indicators, IMD’s new competitiveness report on Iceland, FTSE Russell’s upgrade of the Icelandic stock market, other recent developments and the structural and institutional framework of the economy.

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Highlights

Economic Developments

Iceland has sustained a robust economic recovery and output has picked up due to strong domestic demand, increased gross capital formation and increased external trade. GDP growth is expected to be 4.6% in 2022. The strong recovery of the tourism industry continues. Other export industries, such as fisheries and energy-intensive sectors created increased revenue in the last quarter. Despite growth in exports, the current account was negative in the first quarter of 2022.

Inflation has been persistent this year and measured 8.8% in June. However, the harmonized inflation rate indicates that inflation is relatively lower in Iceland than among important trading partners. In response to rising inflation expectations, the Central Bank increased its key interest rate by 1 percentage point in June, which now stands at 4.75%.

The Icelandic market status will be upgraded to Secondary Emerging market in September by FTSE Russell, which is expected to bring 50 bn. ISK in passive inflows. The upgrade will further facilitate new capital inflow to the Icelandic economy and support capital-raising opportunities for listed companies.

2 Iceland at a Glance

Iceland ranks 16th out of 63 countries in IMD’s newly released competitiveness report and moves up by five spots this year. Infrastructure and Business efficiency rank 8th and 4th, respectively. In this regard, Iceland punches well above its weight in competitiveness. The country also ranks highly on several other international indicators, such as gender equality, global peace, and social progress.

The size of the financial system measured at 455% of GDP in Q1/2022. The financial system is sound and keeps improving. This is reflected in limited and declining household and business arrears and data shows that insolvencies have steadily declined since mid-2020. Furthermore, the non-performing loan ratio is very low, both internationally and historically.

3 Industrial Framework

Iceland is a parliamentary republic with a large public sector. The Central Bank targets inflation and the financial system is characterized by prominent pension funds and banks.

The Icelandic economy has undergone drastic changes in recent years and for a small open economy it is important to frequently convey useful information to stakeholders. Therefore, the report is sent to thousands of recipients in business, governmental administration, and other organisations around the world, in addition to being freely available online.

The Chamber offers a presentation based on the report. For further information, please contact our Economists, Elísa Arna Hilmarsdóttir (elisa@vi.is) and Gunnar Úlfarsson (gunnaru@vi.is).