Iceland Must Tackle Inflation and Make the Most of Immigration

Iceland’s economy is currently one of the fastest growing in the Organisation for Economic Co-operation and Development (OECD). Foreign tourism and strong domestic demand are the reasons for this growth, but it is expected to slow, according to the latest OECD Economic Survey of Iceland. The OECD recommends that Iceland’s policy continue to focus on bringing down inflation, strengthening productivity growth by improving the business climate, and helping migrants integrate.

“Iceland has rebounded strongly from the pandemic and has proven resilient in the face of the economic impact of Russia’s war of aggression against Ukraine across Europe and globally,” OECD Secretary-General Mathias Cormann said when he presented the survey in Reykjavík alongside Minister of Finance and Economic Affairs Bjarni Benediktsson. “Continued monetary policy and fiscal policy tightening remain necessary to return inflation to target and properly anchor inflation expectations. Establishing a one-stop to simplify access to migrant integration services, including skills recognition and Icelandic language literacy, will help to optimise the beneficial impact of the increased number of migrants on long-term growth.”

Inflation to decline but persist

Inflation has remained persistent in Iceland despite efforts to tackle it, including consistent interest rate hikes by the Central Bank. According to the OECD survey, it is projected to decline but still exceed 3% by late 2024. Economic growth is expected to moderate from 6.4% in 2022 to 4.4% in 2023 and 2.6% in 2024, according to the OECD. There are indications that Iceland is reaching its capacity for tourism, and as the industry levels off, household consumption is expected to slow and real wages to continue to weaken.

Reforms to business climate recommended

The OECD survey found barriers to entry for domestic and foreign companies to be relatively high in Iceland, despite progress in tourism and construction. It suggested structural reforms to improve the business climate, such as easing the overreaching system of licences and permits and investing in skills relevant to the labour market. Such reforms would reinvigorate productivity, which has been trending upward by only about 1% yearly, and would help with the fight against inflation, according to the OECD.

Aging population a risk to debt sustainability

When it comes to public expenditure, the survey emphasises that spending on health and long-term care is expected to rise considerably as the population ages, although from a lower base than in almost any other OECD country. The survey recommended reforms such as lifting the retirement age and reducing tax expenditures to slow the build-up of debt.

Better integration of migrants required

Figures from the OECD survey show that immigration in Iceland is rising faster than in other Nordic countries and that it brings large economic benefits. The median age of immigrants in Iceland is lower than in any other OECD country, at between 30-35 years, and their participation rate is higher than in any other country, at over 85%.

The OECD survey emphasises that Iceland should step up its efforts to better integrate migrants and their children, such as by establishing a one-stop shop for services, which would make language training courses more effective and would ease skills recognition. More support is needed for students with immigrant background, including more teacher training in multicultural education.

“Successful integration also requires meeting the housing needs of the immigrant population, including through increasing the supply of social and affordable housing,” the OECD press release on the survey states.

An overview of the survey including findings and charts is available on the OECD website.