Discusses key economic indicators and trade statistics, which countries are dominant in the market, and other issues that affect trade.
Tourism has been a growing force behind Iceland’s economy in the past decade, with opportunities for investors in high-end tourism, including luxury resorts and hotels. The number of tourists in Iceland grew by more than 400 percent between 2010 and 2018, reaching more than 2.3 million in 2018. Tourism in Iceland contracted somewhat in 2019 with 2 million visitors that year, however, and the COVID-19 pandemic has had drastic effects on both tourism and the overall economy. Fewer than 500,000 tourists travelled to Iceland in 2020 (source: Icelandic Tourist Board). The government has implemented measures to bolster the tourism economy and has committed to building out tourism-related infrastructure.
The United States is Iceland’s largest trading partner by country, primarily due to the number of American tourists in Iceland. In 2019, 23.4 percent of Iceland’s tourists were American – by far the largest nationality visiting Iceland. The number of U.S. tourists travelling to Iceland decreased in 2020 due to international travel bans but picked up in 2021 with close to half of all foreign tourists visiting Iceland in the first half of the year hailing from the Untied States. The United States ran a trade surplus in goods with Iceland in 2019, as U.S. consumer products are popular in Iceland, but ran a trade deficit in terms of services with Iceland in 2019, mainly due to tourism and the high number of Americans that visit Iceland. Until recently, U.S. investment in Iceland has mostly been centered in the aluminum sector, with Alcoa and Century Aluminum operating plants in Iceland. However, U.S. portfolio investments in Iceland have been steadily increasing in recent years. Iceland’s convenient location between the United States and Europe, its high levels of education, connectivity, and English proficiency, and a general appreciation for U.S. products make Iceland a promising market for U.S. companies.
Iceland is a member of the European Free Trade Organization (EFTA) and the European Economic Area (EEA), but not the European Union (EU). It is also a member of NATO but has no armed forces of its own. The United States, on behalf of NATO, bears primary responsibility for the defense of Iceland under the terms of a 1951 bilateral defense agreement. The United States maintained a Naval Air Station in Iceland until September 2006 when the base was closed.
The economic environment of Iceland has been characterized by a healthy economic growth rate over the last few years spurred by tourism (4.2 percent in 2017, 4.7 percent in 2018, 2.6 percent in 2019). However, the economy contracted by 6.6 percent in 2020 due to the pandemic’s effect on the tourism and service industries (source: Statistics Iceland). The Central Bank of Iceland projects 4 percent GDP growth in 2021 in its August Monetary Bulletin publication. Inflation has been under or around the Central Bank’s target of 2.5 percent in the past few years (1.9 percent in January 2017, 2.4 percent in January 2018, 3.4 percent in January 2019, 1.7 percent in January 2020). Inflation has risen due to the pandemic measuring at 4.3 percent in July 2021 (source: Central Bank of Iceland). For the past few years, Iceland has had low employment rate (around 3 percent), and the Icelandic job market has depended on foreign workers to fill unskilled and semi-skilled jobs in the tourism and service sectors. Unemployment was 6.4 percent on average during 2020, but was down to 4.1 percent in July 2021, mostly due to an unexpected increase of tourists visiting Iceland this summer (source: Statistics Iceland). As Iceland is a member of EEA, residents from other EEA countries, most notably Poland, immigrate to Iceland, helping to alleviate some of the job market constraints. Immigrants made up around 18 percent of the workforce in 2020 (source: Statistics Iceland).
There is broad recognition within the Icelandic government that foreign direct investment (FDI) has been a key contributor to the country’s economic revival after the 2008 financial collapse. As part of its investment promotion strategy, the Icelandic government operates a public-private agency called “Business Iceland” that facilitates foreign investment by providing information to potential investors and promoting investment incentives. Business Iceland and its sister agency Invest in Iceland have identified the following “key sectors” in Iceland: tourism, aqua culture, data centers, and life sciences. Iceland offers incentives to foreign investors in certain industries, such as the film industry.
The startup and innovation communities in Iceland are flourishing, with the IT and biotech sectors growing quickly. Iceland’s IT sector spans all areas of the digital economy. The Icelandic energy grid derives 99.99 percent of its power from renewable resources, making it uniquely attractive for energy-intensive industries such as data centers.