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The Icelandic Economy

Current State, Recent Developments and Future Outlook
2018 edition
 TABLE OF
CONTENTS

KEY FACTS 3
FOREWORD 4

1. ECONOMIC LANDSCAPE 5

2. INSTITUTIONAL FRAMEWORK 19

3. FINANCIAL SECTOR 29

4. DOMESTIC SECTOR 37

5. RESOURCE SECTOR 46

6. INTERNATIONAL SECTOR 54

7. FUTURE PROSPECTS 61

ACCESS THE FULL REPORT HERE

Front page artwork: Inga Dóra (Eins og var) Iceland Chamber of Commerce | 2

Did you know?
 The total land area is 103,000 km2
and the population is 360,384
 Iceland‘s parliament, Althingi is the
oldest surving parliament in the
world, founded in 930 AD
 Former president Vigdís
Finnbogadóttir became the first
democratically elected female head
of state in 1980
 Iceland is a member of NATO but
does not have any military forces
 Iceland‘s search and rescue services
are solely volunteer-run
KEY
FACTS
Key facts about the economy
 Iceland‘s Gross Domestic Product
(GDP) per capita in 2018 was USD
55,917 (PPP)
 The currency is Icelandic Króna (ISK),
USD 1=ISK 121 (25 July 2019)
 In 2018 unemployment was 2.7% and
in July 2019 inflation was 3.1%
 Iceland‘s current account surplus in
2018 was 2.9% of GDP
 The main exports are tourism (39% of
total), seafood (18%) and aluminium
(17%)
 Government debt-to-GDP ratio in
2018 was 38%
Iceland Chamber of Commerce | 3
 FOREWORD
ÁSTA S. FJELDSTED

“What goes up must come down.” Those words of

Sir Edward Newton have undoubtedly come to
someone’s mind in recent years watching the
Icelandic economy outgrowing most other OECD
countries. Particularly since Iceland faced an
unprecedented financial and economic crisis Ásta S. Fjeldsted
when its three major banks, which assets Managing Director,
Iceland Chamber
amounted to over 9-fold GDP collapsed in the of Commerce

matter of days just over a decade ago. This

recovery story is something Icelanders and others
can learn from and is ingrained in this report.

Iceland Chamber of Commerce | 4

1
Current
Landscape ECONOMIC
LANDSCAPE

Iceland Chamber of Commerce | 5

 Figure 1.1
Iceland has outgrown most developed countries in recent
years
Country rankings, GDP per capita (PPP1 adjusted)
1980 ranking 2016 ranking
United Arab Emirates 1 Qatar
Qatar Macao SAR
Saudi Arabia Luxembourg
Kuwait Singapore
Libya Brunei Darussalam
Bahrain Ireland
Switzerland Norway
Luxembourg United Arab Emirates
Norway Kuwait
United States 10 Switzerland
Canada Hong Kong SAR
Netherlands United States
Denmark San Marino
Germany Netherlands
Austria Saudi Arabia
Belgium ICELAND
France Taiwan Province of China
ICELAND Sweden
Italy Germany
Sweden 20 Australia
Australia Austria
Finland Denmark
The Bahamas Bahrain
Greece Austria
Gabon Canada
Singapore Belgium
New Zealand Oman
United Kingdom Finland
Japan France
Oman 30 United Kingdom
Spain Malta
Venezuela Japan
Trinidad and Tobago Korea
Puerto Rico Spain
Ireland New Zealand
Israel Cyprus
Hong Kong SAR Puerto Rico
Hungary Italy
Argentina Aruba
Cyprus 40 Israel
1980 1986 1992 1998 2004 2010 2018
1 Purchasing Power Party

Sources: IMF World Economic Outlook; Iceland Chamber of Commerce Iceland Chamber of Commerce | 6
 Figure 1.2

Iceland ranks highly in numerous competitive indices

Competitiveness Rankings (Iceland‘s most recent rank1 / total number of countries)

Iceland’s ranking # of countries ranked

Gender Equality (WEF) 1 149

Global Peace Index (IEP, vision of humanity) 1 163
Democracy Index (The Economist) 2 167
Social Progress Index (SPI) 2 146
Human Development (UN) 6 189
Media Freedom (Freedom House) 9 199
Environmental Performance Index (YALE) 11 180
Economic Freedom (HF) 11 180
Corruption (Transparency Int.) 14 180
Global Innovation Index (INSEAD) 20 126
Property Rights Index (IPRI) 20 125
Doing Business (WB) 21 188
Competitiveness (IMD) 24 63
Global Competitiveness Index (WEF) 24 140
Globalization (KOF) 47 203

1 Sources obtained May 2019, with the exception of the Global Innovation Index, which was obtained in July 2019

Source: Respective websites Iceland Chamber of Commerce | 7

 Figure 1.3

Iceland‘s competitiveness has slowly but steadily been

improving this decade
Iceland’s Competitiveness in IMD’s report (Strenghts, weaknesses and recent developments)

2011 2012 2013 2014 2015 2016 2017 2018 2019

Iceland‘s overall 25 24 23 20 24 20
31 26 29
competitiveness

Strengths Weaknesses Iceland’s

position
Economic High Size of the
1 54/63
performance employment economy

2
Government Societal
Taxes 15/63
efficiency framework

3
Business Attitudes
Finances 19/63
efficiency and values

Basic Scientific
4 Infrastructure 13/63
infrastructure infrastructure

Sources: IMD Business School; Iceland Chamber of Commerce Iceland Chamber of Commerce | 8
 Figure 1.4

The economy has been experiencing robust growth but a

mild recession is anticipated this year
GDP growth (Percent)

Actual Projected
9.4
8.0
6.3 6.6
5.2 4.7
4.1 4.6 4.6
3.9
2.3 2.0 1.9 2.1 2.4 2.6
1.3
0.7

-0.4

-3.4

-6.8
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
Sources: Statistics Iceland; Central Bank of Iceland (Monetary Bulletin 2019/2); Iceland Chamber of Commerce Iceland Chamber of Commerce | 9
 Figure 1.5

Iceland‘s economy was one of the fastest growing in the

world in 2016, but growth has since slowed
Annual GDP growth 2014 to 2018 (Percent)

Iceland Other Nordics Euro area OECD total

6.6

4.7 4.6 4.6

2.2
2.6 2.4 2.4 2.6 2.3
2.1 2.1 2.0 1.8 1.9 1.8
1.8 1.7
1.4 1.2

2014 2015 2016 2017 2018

Sources: OECD statistics; Iceland Chamber of Commerce; Statistics Iceland Iceland Chamber of Commerce | 10
 Figure 1.6

Private debt declined significantly after the financial crisis

but has increased slightly in the last two years
Corporate and Household Debt (Percent of GDP)

347 Corporate debt Household debt

350

300
270
250 233

200
158 164
150

100

50

0
2004 2006 2008 2010 2012 2014 2016 2018

Source: Central Bank of Iceland (Monetary Bulletin 2019/2) Iceland Chamber of Commerce | 11
 Figure 1.7

Unemployment is rising again after a gradual decline

since 2010
Unemployment Rate (Percent; yearly average)

8 7.6
7

6
5.4
5

4
3.0 3.0 3.0
3 2.7

0
2001 2003 2005 2007 2009 2011 2013 2015 2017 20191

1 First quarter

Source: Statistics Iceland Iceland Chamber of Commerce | 12

 Figure 1.8

Inflation has been near the Central Bank’s inflation target

for over five years
Annual Inflation Rate (Percent)

Inflation Inflation excluding housing Central Bank’s inflation target

25
21.0
20
18.6
15

10

-5
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Sources: Central Bank of Iceland; Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 13
 Figure 1.9

Interest rates in Iceland appear to be converging to other

developed economies
Central Bank Key Interest Rates (Percent)

Iceland Euro area USA

6.0%
5.5%
5.0%
4.5%
4.0%
3.5% 3.75%
3.0%
2.50%
2.5%
2.0%
1.5%
1.0%
0.5%
0.00%
0.0%
2011 2012 2013 2014 2015 2016 2017 2018 2019

Sources: Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 14
 Figure 1.10

The devaluation of the Króna balanced out a persistent

current account deficit and supported a surplus since 2009
Current Account Balance1 (Percent of GDP)

Current account balance Average 2000-2008

Central Bank forecast Average post crisis
10

5 +5.2%

-5

-10 -10.9%
-15

-20

-25
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

1 Underlying current account, excludes the effects of the failed banks‘ estates. The current account is a broader measure than trade
balance and also takes into consideration factor income and financial transfers.

Sources: Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 15
 Figure 1.11

Even though the Króna has depreciated in the last two

years, the real exchange rate remains high
EUR/ISK and Real Exchange Rate (A higher value indicates a weaker Icelandic Króna)

EURISK exchange rate Real exchange rate1

2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
0

100

+107%

150 141

200

1 Inversed values, nomalised at EUR/ISK’s initial value

Source: Central Bank of Iceland Iceland Chamber of Commerce | 16

 Figure 1.12

Iceland’s net foreign position has transformed with Iceland

becoming a net lender to the rest of the world
Iceland‘s Net International Investment Position (NIIP) (Percent of GDP)

NIIP w/o estates Failed banks estates

100
4 21
0
-5
-45
-100
-105
-200

-300

-400 -375
-448
-500

-600

-700 -654
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 20191

1 First quarter of 2019

Source: Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 17
 Figure 1.13

Iceland has historically been dependent on fishing but

three other export foundations have since emerged
Iceland‘s Exports by Sectors1 (Bn. ISK at 2017 prices)

International sector11 Tourism1 Energy Seafood

1,400

1,200 24%

1,000

800
39%
600

400 19%

200
53% 18%
0
1995 1997 2000 2003 2006 2009 2012 2015 2018

1 All air transport is included in the tourism sector whereas 50% of passenger transport by air is usually included in the international sector in chamber analysis.

Sources: Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 18

2 INSTITUTIONAL
FRAMEWORK

Iceland Chamber of Commerce | 19

 Figure 2.1

Eight parties have representatives in Althingi – Iceland‘s

Parliament
Illustrative; Parliamentary parties, number of MP’s and ministerial posts

Parliamentary Parties Regular MP‘s Ministers & Speaker

Majority Minister of Education,

Science and Culture
Independence Party
Minister of Justice
Progressive Party Minister of Health
Minister of Transport and
Left Green Movement Local Government
Prime Minister
Minority
Speaker of Althingi
People‘s Party
Minister of Finance
and Economic
Center Party
Minister of Fisheries
and Agricultuure
Pirate Party Minister for Foreign Affairs
Minister of Tourism,
Social Democratic Alliance Industry and Innovation
Minister of Social Affairs
Liberal Reform Party and Children
Minister for the Environment
and Natural Resources

Source: Althing Iceland Chamber of Commerce | 20

 Figure 2.4

Most mayors in the largest municipalities have served

longer than one term
Majorities in the Seven Largest Municipalities (Parties by list letter codes)

S P C V D B L Y Minority
Municipality Council seats by party Mayor

Reykjavík 7 2 2 1 11 Dagur B. Eggertsson – since 2014

Kópavogur 5 1 5 Ármann Kr. Ólafsson – since 2014

Hafnarfjörður 5 1 5 Rósa Guðbjartsdóttir – since 2018

Akureyri 2 2 2 5 Ásthildur Sturludóttir – since 2018

Reykjanesbær 3 2 1 5 Kjartan Már Kjartansson – since 2014

Garðabær 8 3 Gunnar Einarsson – since 2005

Mosfellsbær 4 1 4 Haraldur Sverrisson – since 2007

1 S – Social Democratic Alliance, C – Reform Party, D – Independence Party, P – Pirate Party, V – Left Green Movement,
B – Progressive Party, L – L-list, Y – Direct way.

Source: Iceland Chamber of Commerce Iceland Chamber of Commerce | 21

 Figure 2.3

The EEA member states are some of Iceland‘s largest

trading partners
Iceland’s Largest Trading Partners (Percent of total trade in goods and services in 2017)

Other states Britain EEA states

65
10

55

15

3 2 2 1 1 1 1 1
EEA USA China Canada Australia KSA Japan Turkey Brazil Switzerland

1 Total share of imports and exports combined

Sources: Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 22

 Figure 2.4
Public debt has decreased significantly in recent years and
is primarily domestic
General Government Debt1 (Percent of GDP)

Gross debt Net debt

100%
92
90%
80%
70%
60%
50%
40% 37 38

30% 27
20%
10%
0%
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

1 Central Bank forecast after 2018

Source: Central Bank of Iceland (Economic Indicators June 2019) Iceland Chamber of Commerce | 23
 Figure 2.5
Taxes on personal income are high while social security
conbtributions are low due to private pensions
General Government Tax Revenues in 20161 (Percent of GDP)

OECD Iceland

8
Personal income
14
3
Corporate profits
3
9
Social security contributions
3
0
Payroll
0
2
Tax on property
2
11
Goods and services
12

1 Tax on property in 2017 for Iceland due to one-off transactions regarding stability contributions of failed bank estates

Sources: OECD; Statistics Iceland Iceland Chamber of Commerce | 24

 Figure 2.6
Public spending is relatively high in Iceland with the
exception of defence and social protection
General Government Spending in 20161 (Percent of GDP)

6
General public services 8 OECD
1 Iceland
Defence
0
Public order and safety 2
1
4
Economic affairs 5
Environment 1
1
1
Housing and community 1
6
Health 8
1
Recreation, culture and religion 3
5
Education 8
Social protection 16
10

Sources: OECD; Statistics Iceland Iceland Chamber of Commerce | 25

 Figure 2.7

The Icelandic tax system relies heavily on consumption

and labor income
Key Taxes in Iceland
Lower bracket Higher bracket

Tax Rate Recent and proposed changes

 Lowered from 25.5%; lower bracket
VAT1 11% 24%
raised from 7% to 11% in 2015

Labour income2 37% 46%  New lower bracket of 33% introduced

in 2020.

 Unchanged since 2011 when it was

Corporate tax 20%
increased from 18% to 20%

Dividends /  Increased from 20% to 22% in 2017.

22%
Capital gains Tax base is under review.

Payroll tax 6.6%  Lowered by 0.25 pp in 2019 and a

further 0.25 pp is planned

1 Consumption taxes fall into two brackets, the lower being 11% which includes e.g. tourism related activities, media, books, and groceries; the higher
24% which is the general rate; some service is exempt from consumption taxes, such as health service, public transport and schools.
2 Income taxes are divided between two brackets, the lower being 36.94% for the first ~895 thousand ISK of an individual‘s monthly income, and the
higher being 46.24% for income above ~895 thousand ISK. Further, each individual has a tax free allowance in the form of a tax credit, ~56 thousand
ISK in 2019, which is subtracted from the gross tax payable each month.
Sources: PwC; Directorate of Internal Revenue; Iceland Chamber of Commerce, Ministry of Finance Iceland Chamber of Commerce | 26
 Figure 2.8

The Icelandic Króna has been one of the most volatile

currencies in the developed world
Exchange Rate Fluctuations Against the Euro (Annualised volatility)

Free-floating (2003-2009)
21%
Period under capital controls (2010-2017)1
Post outflow controls (2017-July 2019)2

13%
12%
10% 11%
10%
8% 8% 9% 8% 8%
7% 7% 7% 7%
6% 6%
5%

Icelandic Króna Japanese Yen US Dollar British Pound Norwegian Swedish Krona
Krona

1 From 1st of January 2010 till 13th of March 2017

2 From 13th of March 2017 till 14th of July 2019

Sources: Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 27
 Figure 2.9

The Central Bank has a large cushion to fend off short-term

exchange rate fluctuations
Foreign Exchange Reserves (Percent of GDP at year-end)

Total FX reserves Net FX reserves1

60%

50%

40%

30%

20%

10%

0%

-10%

-20%
2005 2007 2009 2011 2013 2015 2017 20192

1 FX reserves less Central Bank‘s foreign currency liabilities, i.e. FX reserves financed in ISK.
2 June 2019
Sources: Central Bank of Iceland (Financial Stability 2018/1); Iceland Chamber of Commerce Iceland Chamber of Commerce | 28
3 FINANCIAL
SECTOR

Iceland Chamber of Commerce | 29

 Figure 3.1

The Icelandic banking system is less leveraged, much

smaller and primarily serves the domestic market
Aggregated Deposit-Taking Bank’s Balance Sheet1 (Percent of GDP)

Domestic lending/deposits Foreign lending/deposits Equity

Other domestic Other foreign

September 2008 May 2019

1,000% 140%
94%
120%
800% 130%
367% 67%
100%
600% 180% 103%
80%
110%
400% 60% 22%
325% 475% 3%
40%
23%
200% 17%
20%
144% 13% 3% 22%
0% 68% 0%
Assets Liabilities Assets Liabilities

1 Arion Bank, Íslandsbanki, Kvika, Landsbankinn, savings banks and their predecessors. Assets and liabilities are classified by location, not currency.
That means domestic assets can, for instance, be denominated in foreign currency.

Sources: Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 30
 Figure 3.2

Iceland‘s credit rating has improved in recent years but is

stagnant due to rising uncertainties
Iceland‘s Credit Ratings (Sovereign debt; Moody‘s, Fitch and S&P rating)

S&P Moody’s Fitch 5-year EUR risk premia1

Investment Aaa/AAA
grade Aa1/AA+ 2.2%

Aa2/AA
Aa3/AA-
A1/A+
A2/A
A3/A-
Baa1/BBB+ 0.9%
Baa2/BBB 0.7%
Baa3/BBB-
Speculative Ba1/BB+
grade
2012 2013 2014 2015 2016 2017 2018 2019

1 Interest rate differential between Icelandic and German government bonds at the time of issuance of Icelandic EUR bonds.

Sources: Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 31
 Figure 3.3
Domestic assets appreciation has recently slowed down

Asset Value (Index, inflation adjusted, Jan. 2010 = 100)

Equity Bonds Real estate

200 YoY real return

June 2019
+10%
180

+9%
160
+0%

140

120

100

0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Sources: GAM Management; Registers Iceland; Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 32
 Figure 3.4

Restrictions on capital inflows (SRR), which have now been

lifted, have influenced the composition of inflows
New Investment Inflows (Bn. ISK)

Total outflows Listed shares inflows Net

Other inflows Government bonds inflows

62
Plan to lift
capital controls
announced in
June 2015
43 SRR on fixed-
income
investment1 SRR abolished1

21
23 22 20 14 18 15
13 11
8
7
5 7
4

-6
2015 2016 2017 2018 2019

1 SRR = Special Reserve Requirement

Sources: Central Bank of Iceland (Economic Indicators June 2019); Iceland Chamber of Commerce Iceland Chamber of Commerce | 33
 Figure 3.5

Despite a young population, Iceland has relatively one of

the largest pension systems in the world
Private Pension Assets 2016 (Percent of GDP)

Denmark 208%

Netherlands 184%

Iceland 155%

Canada 149%

Switzerland 149%

United States 145%

Australia 130%

UK 105%

Sweden 95%

Chile 90%

Source: OECD Global Pension Statistics Iceland Chamber of Commerce | 34

 Figure 3.6

Source: Eurostat
0%
5%
10%
15%
20%
25%
30%
35%
40%
Italy
Finland
Greece
Portugal
Germany
Bulgaria
Sweden
France
Latvia
Croatia
Estonia
European Economic Area

Denmark
Lithuania
Czechia
Slovenia
Spain
Belgium
Netherlands
United Kingdom
Hungary
Malta
Austria
Romania
Switzerland
Norway
Liechtenstein
Poland
Cyprus
Slovakia
Iceland‘s population is the second youngest in the

Ireland
Old Age Dependency Ratio in 2018 (Population 65 and over to population 15-64

Iceland
21%

Luxembourg
Iceland Chamber of Commerce | 35
 Figure 3.7

Pension funds are outgrowing the economy due to decent

returns and high premiums
Pension Fund’s Total Assets (Billion ISK at 2018 prices)
Other domestic Domestic debt Foreign debt and other
Domestic equity Foreign equity
4,500 4,239
4,000

3,500

3,000 2,796 2,336

2,500 2,321

2,000

1,500 1,032
1,000

500

0
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

Sources: Central Bank of Iceland; Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 36
4 DOMESTIC
SECTOR

Iceland Chamber of Commerce | 37

 Figure 4.1

The domestic sector accounts for about two thirds of the

economy
Composition of the Icelandic Economy (Percent of GDP)

Food Production Agriculture

Other
Fisheries Metal Production
Manufacturing

Other Services Electricity &

International Resource Water
IT & Sector
Communications Sector

Culture & Arts 12% 25% Tourism &

Transportation
Financial
Services

Domestic Sector
Construction
63% Real Estate

Public Services Wholesale &

Retail

Sources: Statistics Iceland; McKinsey & Company; Iceland Chamber of Commerce Iceland Chamber of Commerce | 38
 Figure 4.2

Productivity has been increasing in Iceland, putting it

above Finland in terms of GDP per hour worked
GDP per Hour Worked in 2016 (US dollars, constant prices 2010 (PPP))

90
81
80
70 65
62
60 57 55 54 53
50
40
30
20
10
0
NOR DNK SWE ISL FIN Euro area GBR

Source: OECD Iceland Chamber of Commerce | 39

 Figure 4.3

Productivity gains are different across sectors but are

largest in sectors affected by tourism and technology
Productivity Changes by Sectors1 (Cumulative percentage change from 2008 to 2018)

0% 10% 20% 30% 40% 50% 60% 70%

IT and Communications 66%

Accommodation and Food 42%
Transportation and Storage 38%
Construction 38%
Industry2 36%
Wholesale and Retail Trade 32%
Arts and Entertainment 19%
Agriculture, Forestry and Fishing 18%
Rental and Leasing Services 14%
Scientific and Technical Activities 14%
Public Services 7%
Financial and Insurance Activities 0%
19.5% Average

1 All sector definitions are according to NACE V.2

2 Mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply; sewerage, waste management and remediation activities

Source: Statistics Iceland Iceland Chamber of Commerce | 40

 Figure 4.4

The labour market had a declining unemployment rate

amid very high wage growth but that trend is now shifting
Wage Growth and Unemployment (Percent of workforce, percent change)

Wage growth1 Unemployment

12%

10%

8%

6%

4%

2%

0%
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

1 Measured as yearly change in the Wage Index

Source: Statistics Iceland Iceland Chamber of Commerce | 41

 Figure 4.5

Iceland has experienced a strong influx of foreign labour in

recent years
Net Changes in Labour Force (Percent change by background)

Icelandic Immigrants

4,7 4,7 4,7 4,6

3,0 3,0
2,5 2,3
1,7
0,9
0,2

-1,7

-8,4
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sources: Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 42

 Figure 4.6

The Living Standard Agreement has multiple components

with emphasis on absolute wage increases
Wage Increases in the Living Standard Agreement (USD1)

Basic Monthly Minimum Wage Increases

Yearly Add-Ons Linked to

Minimum wage 2,400 Economic Performance

2019 136 Income Guarantee

GDP/Cap Wages
2020 192  If the wage index
+1.0% +24
increases
+1.5% +44 proportionately more
2021 192
than the minimum
+2.0% +64
wage, the minimum
2022 200 +84 wage automatically
+2.5%
increases to offset the
Min. Wage 2022 3,120 +3.0% +104
difference.

1 All numbers are USD based on the USDISK Exchange rate of 125

Sources: Confederation of Icelandic Enterprise Iceland Chamber of Commerce | 43

 Figure 4.7

Housing prices have increased rapidly in the last few years

but since mid-2017 the market has slowed down
Housing Prices and Investment (Indices (Jan. 97=100) until Jun. 18 and b. ISK)
Real prices Price-to-income1 Residential housing investment2
300

243
225

200

149
135

100

0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
20193
1 Housing prices/Disposable income per individual
2 Billion ISK at 2017 prices, number for June 2018 is CBI’s forecast for the whole year
3 Inflation and housing prices for June 2019 and Investment and income based on CBI forecast for the year

Sources: Statistics Iceland; Central Bank of Iceland; Registers Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 44
 Figure 4.8

A large gap has emerged between housing construction

and population growth which finally appears to be closing
Population and Housing Growth (Percent change YoY)
Housing units 20 years old and older inhabitants
Housing adjusted for Airbnb
4.5%
4.0%
3.5%
3.0%
2.5%
2.0%
1.5%
1.0%
0.5%
0.0%
-0.5%
-1.0%
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Sources: Statistics Iceland; Registers Iceland; Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 45
5 RESOURCE
SECTOR

Iceland Chamber of Commerce | 46

 Figure 5.1

Tourism is having a set-back this year after double-digit

growth for almost a decade
Keflavík Airport Passengers (Total and percent change)

Number of tourists (million, r. axis) Total passengers YoY change (l.axis)

Tourists YoY change (l. axis)

40% 2.5
2.3
30%
1.9 2.0
1.8
20%

10% 1.5

0%
1.0
-10%
0.5 0.5
-20%

-30% 0.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20191

1 ISAVIA‘s forecast in June 2019.

Sources: Statistics Iceland; Registers Iceland; Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 47
 Figure 5.2

Consumer prices in Iceland are among the highest in

Europe
Relative Prices of Restaurants and Hotels (European Union = 100)
EU Finland Iceland Switzerland
Denmark Sweden Norway

180

160

140

120

100

0
2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Jun. 2019
Sources: Eurostat; Central Bank of Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 48
 Figure 5.3

Depreciated Króna and more spending per tourist weighs

against the drop in the number of tourists
Card Turnover Per Tourist (Year over year change)

Current exchange rate Constant exchange rate

40%

30%

20%

10%

0%

-10%

-20%

-30%
May. 16

May. 17

May. 18

May. 19
Sep. 16

Sep. 17

Sep. 18
Mar. 16

Jul. 16

Mar. 17

Jul. 17

Mar. 18

Jul. 18

Mar. 19
Jan. 16

Nov. 16
Jan. 17

Nov. 17
Jan. 18

Nov. 18
Jan. 19
Sources: Centre for Retail Studies; Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 49
 Figure 5.4

Iceland is the largest producer of renewable power per

capita in the world
Electricity Consumption (MWh per capita and % from renewables1)

Renewable resources Non-renewable resources

55 100%
50
45
40
35
30
25 98%
0%
20
63% 0% 44% 0% 32%
15 63% 13%
0% 2% 0% 14% 0%
10
5
0
KWT
NOR

CAN

SWE

USA

KOR

BRN

AUS

SAU
BHR

QAT

LUX

ARE
FIN
ISL

1 World Bank only publishes distribution of electricity by output, not consumption, so the distribution
between renewables and non-renewables might be slightly inaccurate
Sources: World Bank; Iceland Chamber of Commerce Iceland Chamber of Commerce | 50
 Figure 5.5

Favorable climate and affordable, renewable energy

makes Iceland an attractive location for data centers
Potential Increase in Profitability by Storing Data in Iceland (Profits; illustrative)

Data Stored Cooler Lower Increased Data Stored

in Europe Climate Electricity Sales due to in Iceland
Prices Green Energy

Source: Iceland Chamber of Commerce Iceland Chamber of Commerce | 51

 Figure 5.6

Iceland’s seafood industry has seen productivity gains

amidst erratic business environment
Seafood Industry (Investment and Productivity)

Labour productivity (l. axis, index 1997=100)1 Investment (r. axis b. ISK at 2018 prices)
200 55
180 50
160 45

140 40
35
120
30
100
25
80
20
60 15
40 10
20 5
0 0
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
1 Working hours and thus productivity has a break in series in 2008

Sources: Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 52

 Figure 5.7

Aquaculture is expanding fast, salmon production in

particular
Aquaculture Production (Thousand tons)

Salmon Trout and arctic char Other

30
26
25
21
20 19

15
15

10 8 8
7 7
5 5 5 5
5

0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20191

1 Projection of total production based on growth in January-May 2019

Sources: Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 53

6 INTERNATIONAL
SECTOR

Iceland Chamber of Commerce | 54

 Figure 6.1

New exports in knowledge based goods and services are

needed to support a balanced long-term growth trajectory1
Export Requirements Along a 3% Economic Growth Path (Bn. ISK; Illustrative2)

2,250
2,000
1,750
New Exports
1,500
1,250 Other Goods
1,000 Other Services

750 Tourism
500
Energy-Intensive Industry
250
Fisheries
0
2017 2022 2027 2032 2037

1 McKinsey assumed a goal of 4% growth p.a. but the Chamber believes a 3% growth rate is more realistic over the long run. Tourism exports are
assumed to grow at a 4% rate until 2022.
2 Real ISK.
Sources: McKinsey & Company, Statistics Iceland, Central Bank of Iceland, Iceland Chamber of Commerce Iceland Chamber of Commerce | 55
 Figure 6.2

Government grants towards R&D have increased manyfold

in the last 15 years
Government Contributions to R&D Grants (Real prices, Index 2004 = 100)

Technology Development Fund Icelandic Research Fund

700

600 613

500

400 376

300 307
214 224 204
200
122 117
100

0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Sources: The Icelandic Centre for Research Iceland Chamber of Commerce | 56

 Figure 6.3

Investment in R&D has been steadily increasing over the

last few years
R&D Expenditure by Sector (PPP Million USD)

Corporations Other public institutions Universities

400
373
355

292
257
243 241
234
178
136

17 17
18 17
17

104 115 126

91 96

2013 2014 2015 2016 2017

Sources: Statistics Iceland, OECD, Iceland Chamber of Commerce Iceland Chamber of Commerce | 57
 Figure 6.4

While Iceland has been improving incentives to conduct

R&D it still trails a number of countries in terms of tax credits
Government R&D Tax Credits and/or Rebates (Percent by bracket, million USD)

Rebate Percentage Absolute Cap1 Tax Rebate

Country Lower Higher Million USD 10m USD Investment2

Australia 43,5 71,0 4,4

Ireland 37,5 No Cap 3,8
Britain 33,0 No Cap 3,3
France 30,0 No Cap 3,0
Canada 35,0 No Cap 2,0
Netherlands 32,0 No Cap 1,5
Austria 14,0 No Cap 1,4
Iceland 20,0 5,0 1,0
Portugal 32,5 1,7 0,6
Norway 20,0 3,0 0,5
Chile 35,0 1,2 0,4
Denmark 22,0 0,9 0,2

1 Australia: Higher bracket only available to companies whose revenue does not exceed 13,5m USD, lower bracket only available to conmpanies whose revenue does
not exceed 14,2m USD; France: Higher bracket cap is 115,8m USD, no cap on lower bracket; Netherlands: Higher bracket cap is 0,4m USD, no cap on lower bracket;
Britain: Higher cap only available to companies who do not employ more than 500 people.; Norway: Higher bracket only available to SME‘s
2 The tax rebate/credit is calculated based on a gross investment in R&D of 10m USD.

Sources: Statistics Iceland, OECD, Iceland Chamber of Commerce Iceland Chamber of Commerce | 58
 Figure 2.20

2015 was the breakout year for the VC industry in Iceland

Timeline of Iceland Based Venture Capital Funds (Year, Type of ownership, USD)

Frumtak I Frumtak II Crowberry Capital

Private Fund Private Fund Private Fund
52m USD 38m USD 37m USD

1997 2008 2015 2017

New Business Venture Fund Brunnur Eyrir Sprotar

Quasi-Public fund Private Fund Private Fund
56m USD 30m USD 34m USD

Source: Iceland Chamber of Commerce Iceland Chamber of Commerce | 59

 Figure 6.6

Iceland has a relatively low proportion of students

graduating with STEM degrees
STEM Degree Graduates as Percantage of Total Number of Graduates (Percent)

European Countries Nordic countries Iceland

30 30 30
29 28
27 26 26 26
25 25 25 24
24 24 23 23
23 23
21 21 21 21
20
18 17
16 16
14 14
Austria
Greece
Finland
Romania
Portugal
Estonia
Britain
Sweden
Slovenia
Croatia
France
Ireland
Switzerland
Spain
Lithuania
Italy
Czech Republic
Poland
Hungary
Slovakia
Norway
Denmark
Latvia
Bulgaria
Malta
Belgium
Cyprus
Iceland
Netherlands
Luxembuorg
Sources: INSEAD – Global Innovation Index 2018, Iceland Chamber of Commerce Iceland Chamber of Commerce | 60
7 FUTURE
PROSPECTS

Iceland Chamber of Commerce | 61

 Figure 7.1

The Iceland Growth Forum had 37 reform proposals to

support a long term sustainable growth trajectory

“Let‘s look outside… And see the big picture“

Source: Iceland Growth Forum presentation Iceland Chamber of Commerce | 62

 Figure 7.2

To capture the disruptive trends that are shaping the

world, the Chamber will operate under four focus lenses
The Four Focus Lenses of Disruptive Trends
Lenses Examples

 Embrace technological  Improve services and achieve  Use big data insights to
changes to drive productivity cost efficiency through connect with customers and
improvements across sectors digitization transform operations

Digitisation

 Support and grow knowledge  Ensuring that all generation’s • Determining how business
driven export sectors of the talents match the need of the leaders can navigate through
Icelandic economy society present challenges

Regeneration

 Maximize value creation of  Protect nature with focus on • Leverage Iceland’s unique
Icelandic resource industries productivity and situations to fight climate
sustainability change
Environmental
Sustainability

 Boost global position of • Safeguarding Iceland’s • Focus on business

Iceland as the country to base position in the EEA and development in new markets
and do business in openness to trade
Global
Connections
Source: Iceland Chamber of Commerce Iceland Chamber of Commerce | 63
 Figure 7.3

More investment in infrastructure is required to soon reach

previous infrastructure levels
Infrastructure Stock and Investment (Broadly defined1)

Infrastructure per capita (m.ISK at 2018 prices, l.axis)2 Infrastructure investment/GDP (r. axis)3

30 40%
25.4 25.4 35%
23.0 30%
20
25%
Projection 20%
15%
10
10%
5%
0 0%
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
2022
2024
2026
2028
2030
2032
2034
2036
2038
2040
2042
2044
2046
2048
2050
1 Infrastructure is the total amount of capital stock and capital formation(investment) in housing and other buildings, roads, bridges, sewers and business
sector construction.
2 See 3 for investment. Population based on Statistics Iceland projections.
3 Assuming constant investment level in real terms 2019 onwards, 0% GDP growth in 2019 and 2,5% growth 2020 onwards

Sources: Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 64

 Figure 7.4

Lack of investment on top of traffic increasing by half in less

than a decade indicates that investment needs to pick-up
Capital Stock in Roads and Bridges (Million ISK per car1)

Capital stock in roads per car 1990-2017 average

1.7

1.6

1.5

1.4
-13%

1.3

0.0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018
1 ICoC projection for 2018 based on Althingi‘s budget. Number of cars growth projected the same as GDP growth in 2017-18

Sources: Statistics Iceland; Iceland Chamber of Commerce Iceland Chamber of Commerce | 65

 Figure 7.5

An interconnector from Iceland to the UK would be one of

the longest in Europe and requires significant investment
Interconnectors in Northern Europe (Length and capacity)

Fenno-Skan
200 km
800 MW

Konti-Skan 1&2
149 km
550 MW
SwePol
245km
600 MW
Iceland-UK
~1,000 km Baltic Cable
800-1,200 MW 262 km
600 MW

NorNed
580km
700 MW

BritNed
England-France 260km
70km 1,000 MW
2,000 MW

Sources: Kvika banki; GAM Management; Iceland Chamber of Commerce Iceland Chamber of Commerce | 66
Iceland Chamber of Commerce | 67