Iceland - Country Commercial Guide
Market Overview

Discusses key economic indicators and trade statistics, which countries are dominant in the market, and other issues that affect trade.

Last published date: 2022-06-08

Iceland is an island country located between North America and Europe in the Atlantic Ocean, near the Arctic Circle with an advanced economy that centers around three primary sectors:  tourism, fishing, and aluminum smelting.  With a population of 370,000, the domestic market is small.  In 2021, tourism accounted for 17 percent of the total value of exports of goods and services (35 percent in 2019 before the COVID-19 pandemic), manufacturing products accounted for 32 percent (mostly aluminum), and marine products were 24 percent of total exports.  Industrial supplies were 29 percent of the total value of imported goods in Iceland in 2021, while capital goods (except transport) were 22 percent, followed by consumer goods (16 percent), transportation equipment (16 percent), food and beverages (9 percent), and fuels and lubricants (8 percent) according to Statistics Iceland.

Tourism has been a growing force behind Iceland’s economy in the past decade, with opportunities for investors and exporters 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 in 2019, however, with visitors falling just below 2 million, which can be attributed largely to the fall of Icelandic budget airline WOW Air.  The COVID-19 pandemic produced drastic effects on tourism, as well as on Iceland’s overall economy.  Less than half a million tourists visited Iceland in 2020, with the number of tourists reaching 700,000 in 2021.  Stakeholders in the industry have been generally optimistic for 2022, with hotels reporting good booking positions for the spring and summer seasons. 

The United States is Iceland’s largest trading partner by country, primarily due to the number of American tourists in Iceland.  In 2021, 33 percent of Iceland’s tourists were American – by far the largest nationality visiting 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.

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, 4.9 percent in 2018, 2.4 percent in 2019).  However, due to the pandemic’s effect on the tourism and service sectors, the economy contracted by 7.1 percent in 2020.  Economic recovery is well underway with GDP growth in 2021 reaching 4.3 percent based on preliminary numbers from Statistics Iceland.  Inflation has been near the Central Bank’s target of 2.5 percent in the past few years, but inflation rose due to the pandemic and measured 7.2 percent in May 2022.  For the past few years, Iceland had a low unemployment rate (about 3 percent), and the Icelandic job market depended on foreign workers to fill unskilled and semi-skilled jobs in the tourism and service sectors.  Unemployment stood at 4.3 percent as of May 2022.  As Iceland is a member of the European Economic Area (EEA), residents from other EEA countries, most notably Poland, immigrate to Iceland, alleviating some of the job market constraints.  Iceland is not a member of the European Union (EU).  The country is 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.

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, aquaculture, data centers, and life sciences.  Iceland offers incentives to foreign investors in certain industries, such as the film industry.

Political & Economic Environment:  State Department’s website for background on the country’s political environment