2023 May Be a Record Year for the Icelandic Tourism Industry

Tourists iceland Fjallsárlón glacier lagoon

The CEO of the Icelandic Travel Industry Association says 2023 could be a bigger year for tourism than the record years before the pandemic, Vísir reports. New figures from Statistics Iceland show dramatic growth in the industry between 2020 and 2022. Tourism as a proportion of Iceland’s GDP amounted to 7.8% in 2022 compared to 4.8% in 2021. It averaged around 8.2% between 2016 and 2018, but this year is likely to break that record.

Each tourist spending more

The summer tourism season is beginning and Jóhannes Þór Skúlason, CEO of the Icelandic Travel Industry Association, says all indicators for the industry’s success are good no matter where you look. “For example the consumption of tourists in the country, which is the highest we’ve ever seen, on variable prices. And that in a year where we have fewer tourists than before, which tells us that the value each tourist is leaving behind is greater than before. Which is also what we want to see,” Jóhannes Þór stated.

Tourism capacity is relative

Asked whether the number of tourists is reaching the maximum that Iceland can receive, Jóhannes Þór answered: “All questions on how many tourists we are able to receive are very relative.” For example, whether most tourists stay in the capital area or whether they spread out across the country is one factor that impacts capacity, according to Jóhanness, who also says that Iceland has built up tourism infrastructure successfully in recent years.

“The goal now must be to achieve stability in a sustainable industry that produces enormous amounts of money for the national economy and builds up society for all of us. That is the goal,” Jóhannes stated.

Central Bank Raises Key Interest Rates by 0.5%

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee of Iceland’s Central Bank has announced that it will be raising key interest rates by 0.5%, with short-term interest rates (seven-day term deposits) now sitting at 6.5%, RÚV reports. Although the housing market has cooled, and global inflation slightly eased, inflationary pressures remain high.

Inflation outlook worsened

At a briefing held at the Culture House in Reykjavík this morning (there is construction work ongoing within the Central Bank’s meeting hall), the Monetary Policy Committee (MPC) of the Central Bank announced its decision to raise key interest rates by 0.5%.

As noted in the Statement of the Monetary Policy Committee published this morning, although the housing market has begun to cool and global inflation has eased slightly, “inflationary pressures are still pronounced” and price increases “widespread:”

“The inflation outlook has worsened since the MPC’s last meeting, and although inflation has most likely peaked, bringing it back to target [rates] will take longer than previously anticipated. The deterioration in the outlook stems in particular from the recently finalised private sector wage agreements, which entail considerably larger pay rises than previously assumed. Furthermore, the króna has depreciated, and the outlook is for a larger positive output gap during the forecast horizon,” the statement reads.

More restraint required in the near future

As noted by RÚV, inflation increased in January and was recorded at 9.9%. In light of this, the MPC believes that it is necessary to increase restraints in the near future in order for inflation to subside. According to the Monetary Bulletin, inflation is expected to average 9.5% in the first quarter of this year, which is 1% more than was expected in November.

International inflation remains high even though it has subsided from last year’s peak, and there remains considerable uncertainty about the economic outlook, the Monetary Bulletin notes. The progress of the war in Ukraine will have a lot to do with international economic development, which will inevitably also affect this country.

The Monetary Bulletin also states that, according to the Bank’s new macroeconomic forecast, GDP growth in 2022 measured 7.1%: “far above the November forecast and, if the forecast materialises, the strongest GDP growth rate since 2007. GDP growth is set to weaken in 2023 but the labour market is expected to remain tight, however.”

Key Interest Rate Raised to 5.5% in Iceland

Central Bank Ásgeir Jónsson seðlabankastjóri

The Central Bank of Iceland’s key interest rate will be raised by 0.75% to 5.5%, the bank’s Monetary Policy Committee announced today. The hike was expected by industry experts and continues a trend of tightening monetary policy in response to inflation and market conditions.

Macroeconomic forecast improves

GDP in Iceland is set to measure nearly 6% this year, according to the Central Bank’s updated forecast, some 1.3% higher than the May forecast. This is due to more robust private consumption growth and a more rapid rebound in tourism than was projected earlier this year. Job numbers continue to rise in Iceland and unemployment to fall.

Continued inflation expected

While the economic outlook has improved, the inflation outlook has continued to deteriorate, the Central Bank reports. Inflation rose to 9.9% in July and is forecast to peak at 11% late this year. The bleaker outlook “reflects stronger economic activity than was forecast in ay, as well as more persistent house price inflation and higher global inflation,” the statement from the Monetary Policy Committee reads.

The MPC added it was likely that the monetary stance will be tightened even further “so as to ensure that inflation eases back to target within an acceptable time frame.”

Iceland’s Central Bank lowered interest rates repeatedly throughout the COVID-19 pandemic with the stated aims of bolstering the economy and maintaining stability on the housing market. Rates reached a historic low of 0.75% in November 2020, but the Central Bank began raising rates steadily once more in early 2021.

Iceland’s Interest Rates Pass Pre-Pandemic Heights

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee of the Central Bank of Iceland has decided to raise the bank’s interest rates by 1%. The bank’s key interest rate is now 4.75%, higher than it has been since March 2019, when it stood at 4.5%. The hike continues a trend of rising rates, with the Central Bank citing inflation as a key factor.

Growth in Iceland but uncertain global outlook

While the Central Bank reports that GDP growth was somewhat stronger in the first quarter of this year than assumed in their May forecast and domestic economic activity remains strong, it underlines that the global economic outlook is “highly uncertain.” Households’ and businesses’ expectations about economic developments have also grown “more tepid,” according to the MPC.

Inflation to continue

Inflation rose to 7.6% in May, with house prices and other domestic cost items cited as “strong drivers of inflation.” Price hikes are widespread and global oil and commodity prices have also risen sharply, the Central Bank notes. Inflation expectations have risen by most measures and are above target.

See Also: Government Approves Measures to Counteract Inflation

“The MPC considers it likely that the monetary stance will have to be tightened even further so as to ensure that inflation eases back to target within an acceptable time frame,” the statement from the committee concludes.

Iceland’s Central Bank lowered interest rates repeatedly throughout the COVID-19 pandemic with the stated aims of bolstering the economy and maintaining stability on the housing market. Rates reached a historic low of 0.75% in November 2020, but the Central Bank began raising rates steadily once more in early 2021.

Central Bank Raises Key Interest Rate to 2%

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee (MPC) of the Central Bank of Iceland has decided to raise the Bank’s interest rates by 0.5 percentage points. The Bank’s key interest rate will therefore be 2%. This is the Bank’s fourth interest rate hike since May, indicating a change in direction as the economic forecast has improved.

The Central Bank’s key interest rate reached a historic low of 0.75% in November 2020. In comparison, rates in January 2020 stood at 3% and in January 2019 at 4.5%.

According to the Bank’s new macroeconomic forecast, GDP growth is expected to measure about 4% in 2021. Better prospects for exports result in an improved outlook for GDP growth compared to projections from last August. GDP growth next year is expected to measure just over 5%. The Central Bank nevertheless states that “significant uncertainty remains, and as before, economic developments will depend on the path the pandemic takes.”

Inflation rose to 4.5% in October, according to the Central Bank’s statement, and is expected to continue rising in the coming months but then start to ease. Global price increases, a more rapid rebound in domestic economic activity, and rising wage costs are some of the factors behind the rise.

Historical GDP Drop in Iceland Still Less than Predicted

Central Bank

Iceland’s Gross Domestic Product decreased by 9.3% in the second quarter of 2020 compared to the same period in 2019, according to estimates from Statistics Iceland. It is the largest fall in quarterly GDP since Statistics Iceland began measuring economic growth on a quarterly basis. The drop, however, was less drastic than predicted, and Iceland has experienced less of a downturn than most of mainland Europe. The winter ahead is expected to be difficult.

The COVID-19 pandemic and measures taken to counter its spread had a clear economic impact in Iceland in the second quarter of this year. Employment declined by 11.3% compared with the same quarter in 2019. Domestic demand dropped by 7.1% and household expenditure by 8.3%, while government expenditure rose by 3%. Travel restrictions had a significant effect on both imports and exports of services during the period. Exports decreased by 38.8% while imports decreased by 34.8% compared to the same period last year.

Better than Expected

Iceland’s GDP has decreased for two quarters in a row, generally indicative of a recession. Though the newly-released figures are hardly encouraging, Gylfi Zoega, Professor of Economics at the University of Iceland, says they are better than expected. “The Central Bank expected an 11% contraction in the second quarter, but it has now come to light that it is 9.3%. So what this new news is saying is that this is a slightly smaller contraction and that the situation is a little better, not much better, but a little better than expected,” Gylfi told RÚV. One factor that has softened COVID-19’s economic impact in Iceland is that locals have been spending more domestically. Government measures to stimulate the economy and the Central Bank’s lowering of interest rates have also had a positive impact, Gylfi stated.

Iceland’s 9.3% contract is also smaller than that of many countries in mainland Europe, as the numbers in Statistics Iceland’s report show. The European Union as a whole experienced a contraction of 11.7% in GDP, while the decrease was 20.4% in the United Kingdom, 18.5% in Spain, and 13.8% in France.

economic recession europe stats iceland
Statistics Iceland.

Challenging Winter Ahead

In a televised interview yesterday, Governor of Iceland’s Central Bank Ásgeir Jónsson outlined some of the reasons Iceland had come out of the second quarter relatively well. “First of all, we are an island and we actually managed to get control of the virus relatively early. Then there is a lot of so-called ‘monetary leeway’ in Iceland. Interest rates were so high when this shock started, so we were able to lower interest rates significantly and get relatively strong stimulus through monetary policy and stimulate private consumption and more.”

A recent poll found 38% of employers expected to resort to layoffs in the coming months, while only 6% planned to hire staff. Ásgeir stated that the coming winter could indeed prove difficult. “There will be problems ahead but I believe we can solve them,” he stated in a television interview yesterday. “We still have some cards up our sleeves and we will respond to this recession and try our best to ensure that it affects the nation as little as possible.”

GDP Expected to Contract by 8% in 2020

Central Bank of Iceland

In its most recent quarterly report, the Financial Stability Committee of the Central Bank expects GDP to contract by 8% in 2020. The report notes that while Iceland’s three commercial banks are in a strong capital and liquidity position, there is the risk that the Central Bank’s easing of policy instruments could lead to an increase in asset prices and an increase in the likelihood of systemic risk within the economy.

The financial system on “sound footing”

The Financial Stability Committee (FSC) of the Central Bank is required to assess the value of the countercyclical capital buffer (i.e. macroprudential instruments to help counter procyclicality in the financial system) on financial institutions on a quarterly basis.

In accordance with this obligation, the FSC has published its newest quarterly report, which forecasts that GDP will contract by 8% this year. The report notes that despite the effects of the COVID-19 pandemic, Iceland’s financial system is “on sound footing,” with private sector balance sheets having grown stronger in recent years, reinforced by deleveraging and higher equity ratios.

Despite positive measures taken by the Central Bank, however, the report also states that the pandemic has accelerated the contraction of the tourism industry and the reduced access to corporate loans from financial institutions, a trend that began last year.

A possible “wave of insolvencies”

The report further outlines a number of negative side effects that can be traced to the pandemic: uncertainty about Iceland’s foreign currency revenues; a possible “wave of insolvencies” among companies in the tourist sector; a drop in aluminium prices; the disruption of marine-product sales; rising unemployment; and a drop in commercial property prices (residential property prices remain relatively unchanged).

Over the past weeks and months, the Government and the Central Bank have responded to the crisis with the adoption of wide-ranging measures, including expanding access to credit and the lowering of financing costs. These measures – which could help to reinvigorate the economy – do not come without some risk, however:

“The low-interest environment resulting from pandemic response measures exacerbates the risk of a debt bubble, either in specific sectors or in the broader economy, at a time when the financial stability policy stance is more accommodative than before. This could undermine financial stability in the coming term. It is therefore essential to take appropriate action if increased risk appetite leads to excessive credit growth when the impact of the pandemic tapers off and the economy starts to recover.”

Unemployment to reach its zenith

Haukur C. Benediktsson, Director of Financial Stability at the Central Bank, and Ásgeir Jónsson, Governor of the Central Bank, introduced the report’s findings in a press conference earlier today. Summarising the findings of the report, Haukur predicted that unemployment would reach previously unknown levels in 2020. The FSC  expects unemployment to peak at between 7.4-10% in 2020, with labour-intensive sectors to be hit the hardest:

“The COVID-19 pandemic and its implications have had a profound impact on Icelandic households. The most serious is the impact on the labour market, with many companies scaling down or even halting operations. As a result, large numbers of employees have either had their working hours reduced or have lost their jobs entirely. Unemployment has soared and, according to the Bank’s most recent macroeconomic forecast, is expected to approach 12% in Q3 and measure 9% for the year as a whole, as compared with 3.6% in 2019 and the post-crisis peak of 7.6% in 2010.”

Iceland’s Central Bank Lowers Interest Rates to Record 1%

Central Bank Ásgeir Jónsson seðlabankastjóri

The Monetary Policy Committee of the Central Bank of Iceland has decided to lower the bank’s interest rates by 0.75%. The bank’s key interest rate will now be 1%, representing a historic low. The Central Bank’s new macroeconomic forecast projects an 8% contraction in GDP in 2020 followed by GDP growth of nearly 5% in 2021.

“The predominant factor underlying this forecast is a more than 80% decline in tourist visits to Iceland,” a press release from the bank states. “The outlook is for a steep rise in unemployment, which appears set to reach 12% in Q3 and measure just under 9% for the year as a whole.” The Bank expects economic activity to gradually normalise starting in the second half of this year, though it admits “uncertainty is unusually pronounced” and “economic developments will depend on the path the pandemic takes and the progress made in unwinding the associated public health measures.”

The Central Bank hopes that lower interest rates will contribute to a more rapid economic recovery than would otherwise occur.

Iceland to Measure Social and Environmental Prosperity

Iceland will broaden its methods of measuring the nation’s prosperity to include social and environmental factors as well as economic ones. The Icelandic government has approved a motion from the Prime Minister to implement the use of 39 well-being indicators to measure prosperity and quality of life in the country. The 39 indicators will be used to shape government policymaking.

Shifting focus from GDP

“Gross Domestic Product and economic growth are certainly important metrics and will continue to be so, but these factors do not tell the whole story about people’s quality of life and the successes of communities,” reads a statement from Prime Minister Katrín Jakobsdóttir. “It is important to have metrics that take the environment, society, and economy into account.”

Iceland is not the first country to take this approach: many countries have begun to measure national well-being in recent years. Some, like New Zealand, have been using these measurements to design their budgets and shape policy, shifting focus from economic growth to the well-being of their citizens.

Climate, education factored into well-being

Iceland’s 39 well-being indicators are separated into three categories – social, economic, and environmental – and relate to the UN’s Sustainable Development Goals. The social indicators of well-being fall into categories including health, education and work-life balance, while the environmental indicators address issues including air quality, climate, waste, and recycling. Statistics Iceland will oversee the execution and development of the new initiative.

In an interview with Iceland Review, Environment Minister Guðmundur Ingi Guðbrandsson suggested the indicators could help Iceland shift its priorities toward a more sustainable and climate-friendly economy. “With the new five-year budget, I hope that we start seeing the first goals towards other indicators rather than just gross national product. That is a development that is happening in other parts of the world too, and I think it would be very exciting to see how we succeed in implementing that in our small economy.”

Brexit Likely to Cost Icelanders, Study Shows

Minister for Foreign Affairs Guðlaugur Þór Þórðarson.

If the UK leaves the European Union without a deal, it could cost each Icelander ISK 13,000-22,000 ($107-180/€95-161) per year, according to a German study on the economic effects of Brexit. The study, carried out by Bertlesmann Stiftung, found the UK’s departure from the EU to have negative consequences both for the United Kingdom and all countries belonging to the European Economic Area. Kjarninn reported first.

Soft Brexit would mitigate impact

Bertlesmann Stiftung’s report asserts Iceland’s economic losses as a result of Brexit could amount to a 0.3% drop in GDP, or around ISK 22,000 ($180/€161) per resident per year in the case of a “hard Brexit” (departure with no deal). If the UK leaves after negotiating an agreement with the EU, however, those losses would be mitigated and would amount to a 0.18% contraction in GDP and a loss of ISK 13,000 ($107/€95) per person per year.

Iceland would not be among the countries hardest hit by UK’s departure: Ireland, the Netherlands, and Belgium, would face a sharper economic downturn from the event, though Iceland and Norway, due to their proximity to the UK and high productivity, would experience high risk if an agreement is not reached between the UK and the EU regarding the former’s departure, the study predicts.

Worst-case scenario unlikely

According to Iceland’s Ministry for Foreign Affairs, the government has been working hard to secure key interests that would be impacted by Brexit, and has made agreements with UK authorities on issues such as continuing rights of residents, trade, and aviation.