The Icelandic Economy Q4 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

The Icelandic economy has rebounded after a swift, albeit sharp, contraction in GDP in 2020. Last year, economic growth was the highest in 15 years, with domestic demand, investments, and services growth as the main drivers. Recent forecasts anticipate slower growth in 2023 than previously expected, with decelerated investment growth and moderated domestic demand.

Sharp growth came in tandem with a heated housing market and rising inflation due to higher demand. Monetary policy has tightened in response, with the latest key interest rate hike in August marking the 14th hike since 2021. Although inflation has begun to ease, it's doing so very slowly, with projections indicating 8.7% in 2023. Short-term indicators suggest that demand has cooled, but the housing market remains resilient.

The number of employed persons on the labour market stood at 229 thousand in July, with the tourism industry contributing the most job additions in recent years. The share of immigrants among employed individuals reached 23% in August, setting a new record and underscoring the significance of immigration in the thriving economy.

Additionally, Iceland's leadership in renewable energy, targeting a fossil fuel-free status by 2040, has met challenges. Recent stagnation in harnessing energy resources and a potentially inefficient project approval process, coupled with increasing green energy demand, might lead to future shortages. Economic forecasts highlight uncertainties surrounding these future energy projects.

• Read the full report here

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 standards, a dynamic economy, and positive, 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, Gunnar Úlfarsson (gunnaru@vi.is) and Ragnar Sigurður Kristjánsson (ragnars@vi.is).