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 390,000, the domestic market is small. In 2022, tourism accounted for 26 percent of total value of exports of goods and services (35 percent in 2019 before the COVID-19 pandemic), manufacturing products accounted for 23 percent (mostly aluminum processing), and marine products were 26 percent of total exports. Industrial supplies were 28 percent of the total value of imported goods in Iceland in 2022, while capital goods (except transport) were 23 percent, followed by fuels and lubricants (15 percent), transportation equipment (14 percent), consumer goods (13 percent), and food and beverages (8 percent) according to Statistics Iceland, the center for official statistics in Iceland.
Tourism has been a growing force behind Iceland’s economy over the last decade, with increased opportunities for investors in high-end tourism, including luxury resorts and hotels. The number of tourists in Iceland reached more than 2.3 million in 2018. Tourism in Iceland contracted in 2019 and 2020 due to COVID-19 with the total number of tourists going down to 2 million in 2019 and down to 486,000 in 2020. As of summer 2023, the tourism sector has fully recovered, with 1.8 million tourists in 2022, and a projected number of 2.3 million tourists expected for 2023.
The United States is Iceland’s largest trading partner by country, primarily due to the number of American tourists in Iceland. In 2022, 27 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 smelters in Iceland. 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, along with general appreciation for U.S. products makes 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, the pandemic set back the tourism and service sectors, and the economy contracted by 7.1 percent in 2020. Economic recovery is well underway with GDP growth in 2021 reaching 4.3 percent, and 6.4 by 2022. Inflation rose due to the pandemic and measured 7.2 percent in May 2022, and currently stands at 7.7 percent as of August 2023. For the past few years, Iceland had a low unemployment rate (about 3.5 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 2.9 percent as of August 2023. As Iceland is a member of European Economic Area (EEA), residents from other EEA countries, most notably Poland, immigrate to Iceland, alleviating some of the job market constraints.AnchorAnchorAnchor 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, food and natural products, energy and green solutions, innovation, fisheries, creative industries, and life sciences. Iceland offers incentives to foreign investors in certain industries, such as the film industry.
Political Environment
Visit State Department’s website for background on the country’s political and economic environment..