Iceland

High inflation limits domestic growth

Iceland's economic landscape will continue to be affected by its key export sectors, mainly aluminium, seafood, and tourism. The aluminium industry is grappling with challenges from a gloomy macroeconomic outlook and global energy transition dynamics, yet prices remain above pre-pandemic levels, providing a silver lining. The seafood sector benefits from elevated prices, potentially bolstered by the El Niño effect in 2024, contributing to its overall resilience. Iceland's tourism industry remains robust, with a "high-end" profile shielding it from the brunt of a slowdown in global tourism. Despite broader economic uncertainties, the combination of these sectors showcases Iceland's adaptability and resilience in navigating global challenges in 2024.

In 2024, Iceland's domestic economy faces headwinds as domestic demand is poised to slow down. Persistent high inflation, expected to remain elevated throughout the year, coupled with a weakening labour market, will contribute to this slowdown. The notably high policy rate, standing at 9.25% in December 2023, is expected to damp business activity and is likely to be sustained until inflation converges with its target. The current government is adopting a cautious approach by slowing down public investments and spending to alleviate inflationary pressures.

Stronger balances in 2024

In 2023, the current account balance is forecasted to be positive for the first time since 2020. This stems from the improved balance of services due to the robust resurgence of tourism. The main negative contributor continues to be the deficit in the balance of goods, which widened in 2023. Export of goods have fallen due to lower external demand while imports continued to rise as domestic demand remained strong. Moreover, the primary income balance, reflecting investment revenues, returned to surplus.

Iceland's government debt and balance are anticipated to improve in 2024. With the current administration strategically slowing down public investments and spending to alleviate inflationary pressures, there is an expectation that the public deficit will improve. Consequently, this approach is likely to contribute to an improvement in the debt-to-GDP ratio. Despite these efforts, the country is poised to record a deficit for the sixth consecutive year. The delicate balance between fiscal prudence and economic stability remains a key focus as Iceland struggles with high interest rates.

Disruptions caused by volcanic eruptions

The recent volcanic eruptions in Iceland have cast a shadow over the nation, leading to a short-term downturn in tourism and necessitating the relocation of almost 4,000 individuals, which is nearly 1% of the population. The impact on housing has sparked animated debate over immigration, with some argued that Icelandic citizens should be first in line for housing.

The next parliamentary elections should be held before September 2025 and, given that the current coalition comprising the Left-Green Movement, the Progressive Party, and the Independence Party collectively polls around 33%, it is not expected that a snap election will be called. The last election occurred just a month before the final possible date. In 2024, the island nation will also hold a Presidential election in June, with the incumbent President opting not to run again. Candidates are currently engaged in securing the necessary 1,500 voter signatures for ballot access. Despite the electoral dynamics, it's important to note that the President in Iceland has limited power.

Last updated: January 2024