Economic Outline

Economic Indicators

In the last decade, Iceland's economy grew at a relatively fast pace, driven by unprecedented growth in tourism, strong consumption, and falling unemployment. Following a strong post-pandemic recovery, Iceland's economy significantly slowed down in 2024: data from the national statistical office show that, in 2024, Iceland's GDP grew by 0.5% in volume (from 5% one year earlier), reaching a nominal value of ISK 4,616 billion, as the combined household and government final consumption and gross fixed capital formation rose by 2.3% in 2024, matching the growth rate from the previous year. A larger-than-expected negative impact from net exports emerged, driven by slow tourism in 1H24, reduced marine production, and a one-off spike in investment goods imports. For 2025, the IMF projects growth at 2.4% of GDP, followed by 2.2% in 2026.

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 8% 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 around 40% of merchandise exports). In 2024, the general government’s financial balance was estimated at a deficit of ISK 160.8 billion, or 3.5% of GDP, compared to a deficit of ISK 99.5 billion in 2023 (2.3% of GDP – official governmental figures). Preliminary data show a 5.8% increase in government revenue and an 8.6% rise in government expenditure from the previous year. The current Fiscal Plan (2025-2029) aims for a balanced budget at the general government level by 2029. At the end of 2024, general government net financial assets were estimated at -ISK 1,731.9 billion (37.5% of GDP), compared to -ISK 1,552.6 billion (35.8% of GDP) in 2023. Financial assets totalled ISK 2,613.5 billion (56.6% of GDP), while total liabilities rose by 6.5% to ISK 4,345.4 billion (94.1% of GDP). Central government's gross debt was estimated at ISK 3,748.6 billion (81.2% of GDP), with local governments’ gross debt at ISK 606.3 billion (13.1% of GDP). Debt is expected to decrease over the forecast period, supported by modest primary fiscal surpluses and the use of accumulated cash deposits, which were 7.4% of GDP at the end of 2024. The planned sale of the state's remaining 42.5% stake in Íslandsbanki could further reduce the debt ratio. According to Statistics Iceland, the average consumer price inflation in 2024 was 627.5 points, a 5.9% increase from 2023. This follows an 8.8% rise in 2023 and 8.3% in 2022. The rate is expected to gradually decrease towards the Central Bank’s target of 2.5%, reaching it by 2026, although higher imported inflation from an intensified global trade war could present challenges for both fiscal and monetary policy.

The labour market has improved significantly in the last years, and unemployment decreased at the same time as the working-age population increased (also thanks to the inflow of Ukrainian refugees). In Q4/2024, the unemployment rate was estimated at 2.9% 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 78,808 in 2024 by the IMF), and one of the lowest poverty rates. 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.

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