The Icelandic Economy Q3 2023

The report covers the development of short-term indicators, the current state and outlook of the economy, external trade in goods and services, inflation and currency developments and outlook, and other economic insights.

Economic Developments

Demonstrating resilience and the capacity for swift recovery, the Icelandic economy expanded by 6.4% in 2022. The main drivers were increased domestic demand and growth in services exports. Forecasts project growth of over 4.8% in 2023, where strong demand, capital formation, and positive effects from net trade are key drivers.

The rapid expansion of the economy was accompanied by a tight labour market, mounting inflation and a heated real estate market. In fact, the residential housing price index grew by over 20% on average in the greater Reykjavik area in 2022. Households in Iceland reaped the benefits from rising housing prices as the individual loan-to-value (LTV) ratio of real estate decreased from 34% to 30% by the end of 2022. The LTV ratio is currently at its lowest value since 1997.

The Central Bank of Iceland has raised rates in response to elevated inflation, with the most recent hike in May marking the 13th consecutive hike. CBI's interventions appear effective as inflation begins to ease. Nonetheless, inflation is projected at 8.8% for 2023, with no immediate prospect of attaining the 2.5% target. Households demand remains resilient but short-term indicators, such as payment card turnover, suggest easing domestic demand.

We received positive news of the acquisition of Kerecis, an Icelandic firm specializing in fish skin-based tissue regeneration, by the international medical products company, Coloplast, for 1.3 billion USD. The price tag of the firm makes the acquisition the second largest one in Iceland. Rumours of the transaction potentially influenced the appreciation of the ISK, given the expected foreign currency influx.

Our recent reports of the Icelandic economy and their insights were highlighted by the OECD’s recent report on the economy in 2023. Their analysis shows that Iceland’s recovery was swift, with thriving tourism and strong domestic demand. However, the country faces some challenges that need to be addressed to control inflation, raise productivity, and make the most of immigration.

Iceland at Glance

Iceland retains its 16th place among 64 economies in competitiveness according to IMD Business School's latest report, marking the second consecutive year in this position; a commendable achievement considering the country's relative size.

This ranking reflects Iceland's exemplary infrastructure and improved economic performance, particularly in the labour market. Conversely, for the first time in a decade, business efficiency has declined, and government efficiency is at an eight-year low.

Furthermore, high educational level, the dynamism of the economy, and positive and open attitudes are some of Iceland's most attractive features as highlighted in a recent survey among executives in Iceland, published alongside the competitiveness report.

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

You can find the report here