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.

After having suffered from the international crisis, Iceland's economy recovered, also thanks to a USD 2 billion loan granted from the IMF to stabilise the exchange rate of the Icelandic krona and to restore confidence, driven by unprecedented growth in tourism, strong consumption and falling unemployment. In 2021, an early opening of the economy contributed to a rebound in GDP (estimated at +3.7% by the IMF) after the recession experienced following the outbreak of the Covid-19 pandemic one year earlier). Growing wages contributed to an increase in private consumption, whereas tourism recovered only partially. The economy is projected to grow by 4.1% in 2022 and 3.7% in 2023, driven by rebounding foreign tourism and robust goods exports. Business investment is expected to ease as pent-up projects are being terminated, while household consumption should remain solid (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 10% of GDP), making it vulnerable to external shocks. This is why, following the Covid-19 pandemic, the Icelandic economy came to a standstill. The effects of the crisis are clearly visible. Public debt has risen to 75.8% of GDP in 2021 (from a pre-pandemic level of 66.1%) but is expected to decrease marginally in 2022 (75.4%) and 2023 (73.9%). The public deficit stood at an estimated 3.5% of GDP in 2021 and is expected to peak at -6.2% this year, before easing in 2023 (-3.9% - IMF). Between May and November 2021 the Central Bank tightened its monetary policy, raising the interest rate in four steps, from 0.75% to 2%. Despite such measures, inflation spiked to 4.3% in 2021. While the inflationary pressure should diminish somewhat in 2022, the level of inflation will remain elevated and noticeable (at around 3.5%), before returning to the Central Bank’s inflation target of 2.5% in 2023. 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. Nevertheless, it definitively withdrew its candidacy in March 2015.

Iceland's unemployment rate increased exponentially to 7% in 2021 despite hiring subsidies, from 3.9% in 2019, due to the negative economic impact of the COVID-19 pandemic. The IMF expects the rate to decrease to 5% this year and 4% in 2023, although the rate will remain very dependent on the development of tourism (which represents almost one-fourth of total employment). Overall, Iceland has a high standard of living, one of the highest GDP per capita in Europe (estimated at USD 58,151 in 2021 by the IMF), and one of the lowest poverty rates in the world (4.9% as of 2021 – data Iceland Monitor). Nevertheless, Iceland is among the countries with most people living abroad and will have to import thousands of foreign workers to meet the needs of businesses.

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