ECONOMIC SURVEY OF ICELAND
Making the most of a strong rebound
Reykjavik, 20 June 2023
OECD Economics
OECD
oe.cd/iceland
The economy has rebounded strongly from COVID
Source: OECD Economic Outlook No. 113 database.
90 95 100 105 110 115 90 95 100 105 110 115 2019 2020 2021 2022 2023 2024 Index 2019=100 Index 2019=100 Iceland Nordics OECD OECD - Europe GDP level Volume 2
The labour market remains tight
Source: Statistics Iceland.
3 0 1 2 3 4 5 6 7 8 9 10
Unemployment rate % of labour force, seasonally adjusted 81 82 83 84 85 86 87 88
Labour force participation rate % of working-age population
A.
B.
The central bank has responded to rising inflation
Note: Inflation refers to national headline CPI.
Source: Central bank of Iceland and OECD, Consumer Prices database.
0 2 4 6 8 10 12 0 2 4 6 8 10 12 Jan-20 Jul-20 Jan-21 Jul-21 Jan-22 Jul-22 Jan-23 % % Inflation Policy rate
Inflation 4
Fiscal consolidation has started but more is needed
Note: Fiscal balance is the difference between total government revenues and expenditures. Underlying budget balance is the difference between total government revenues and expenditures corrected for the cycle and one-off events.
Source: OECD Economic Outlook No. 113 database.
-15 -10 -5 0 5 10 15 -15 -10 -5 0 5 10 15 2000 2004 2008 2012 2016 2020 % of potential GDP % of GDP ←Fiscal balance Underlying budget balance→ 2022
5
Growth is expected to gradually slow
Source: OECD Economic Outlook No. 113 database.
(Annual growth, unless specified) 2021 2022 2023 2024 GDP volume 4.3 6.4 4.4 2.6 Unemployment rate (% of labour force) 6.0 3.7 3.9 4.3 Consumer price index 4.4 7.8 7.2 3.4 Current account (% of GDP) - 2.8 78.4 78.6 78.6 Budget balance (% of GDP) - 8.4 - 4.3 - 2.5 - 1.4 General government gross debt (% of GDP) 77.2 78.4 78.6 78.6
6
Raising productivity in a sustainable way
7
Wages have long been outpacing productivity
60 80 100 120 140 160 60 80 100 120 140 160 2012 2014 2016 2018 2020 2022 Index, 2012Q1 = 100 Index, 2012Q1 = 100 Real compensation per hour, total economy Real productivity per hour worked, total economy
Source: OECD Economic Outlook No. 113 database. Productivity and wages Index, 2012Q1 = 100 8
earners to work more
Marginal effective tax rate for second earners by hours worked
Hours worked ( % of full-time work)
Note: The marginal effective tax rate (METR) is computed according to the formula METR=1-(Δy net earnings)/(Δy gross earnings) for a two-earner couple with 2 children, claiming social assistance and housing benefits, whenever eligible. Annual housing costs are set at 20% of average wage of Iceland. In both panels, the second earner earns 67% of the average wage of the first earner.
Source: Own calculations based on output from the OECD tax-benefit model, version 2.5.0.
0 20 40 60 80 100 0 20 40 60 80 100 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 % %
Iceland Nordics excluding Iceland OECD
The tax-benefit system should encourage second
9
Investment in the right skills is needed
0 10 20 30 40 50 0 10 20 30 40 50 CZE SVK HUN POL SVN SWE FIN LUX DNK EU FRA BEL OECD LTU AUT NOR CHE LVA NLD ITA ISL EST DEU GBR ESP IRL GRC PRT % of workers aged 15-64 % of workers aged 15-64 Overqualification Underqualification
Source: OECD, Skills for Jobs database. Skills mismatch 2019 or latest 10
Market access should be made easier for new firms
Barriers to domestic and foreign entry
Index 0 (less stringent) to 6 (stringent), 2018
Note: A higher indicator value means more stringent regulation.
Source: OECD, Product Market Regulation database.
0.0 0.5 1.0 1.5 2.0 2.5 3.0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 LTU DNK GBR LVA DEU SWE ESP NOR SVN FIN PRT HUN ITA NLD EST CHE GRC OECD AUT IRL POL CZE FRA LUX SVK ISL BEL
11
Tourism could soon reach the limits of sustainability
Data for 2019 except Finland (2018) and Sweden (2014).
Source: Statistics Iceland; OECD, Tourism database.
0 1 2 3 4 5 6 7 0 1 2 3 4 5 6 7 CHL USA MEX ISR POL CAN GBR TUR CRI NZL LVA FIN LTU SVK ITA SWE FRA CZE HUN ESP IRL PRT EST DNK ISL Overnight visitors per inhabitant Overnight visitors per inhabitant Tourists 2019 or latest 12
Efforts to reduce carbon emissions should be stepped up
0 3 6 9 12 15 18 0 3 6 9 12 15 18 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Kg per capita Kg per capita Iceland OECD
Total greenhouse gas emissions per capita Source: OECD, Environment Statistics database. 13
Making the most of immigration
14
Immigration is rising faster than in other Nordic countries
Panel A: 2023 refers to first quarter only. Panel B: immigration flows into Iceland, including both Icelandic and foreign citizens who obtain a residence permit or a work permit for over three months; the other Nordics include Denmark, Finland, Norway, and Sweden.
Source: Statistics Iceland; Nordic Statistics database.
0 1 2 3 4 5 1990 1995 2000 2005 2010 2015 2020 % B. Immigration flows As a share of population Iceland Other Nordics 0 4 8 12 16 20 1987 1992 1997 2002 2007 2012 2017 2022 % A. Foreign citizens As a share of population 2023*
15
Immigration brings large economic benefits
Calculations estimate the effect of expanded labour supply on GDP based on ‘baseline’ (keeping current demographic trends and net migration at 2019 levels) and ‘no migration’ (net migration is set to zero) scenarios.
Source: Statistics Iceland; Eurostat, Population Projections and OECD National Accounts database.
premium relative to 2019 Baseline versus no migration scenario 0 2 4 6 8 10 12 0 2 4 6 8 10 12 DNK FIN NOR SWE ISL % %
GDP
2030
Gains by
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Gains by 2040
Immigrants are young and have high participation rates
A. Median age of the foreign-born and native-born population, 2022
B. Activity rate by background, 15-64 years, 2021
Panel A: data refer to population as of 1 January 2022 for all countries. Median values were imputed based on Eurostat age-distribution interval data.
Panel B: activity rate is calculated as economically active (employed and unemployed) working age (15-64) population divided by the total working-age population. In both panels, OECD-EU average refers to the simple average of the EU countries that are OECD members.
Statistics Iceland; Eurostat. 17 0 10 20 30 40 50 60 70 ISL POL FIN IRL DNK NOR CZE SWE ESP BEL AUT ITA NLD LUX OECD-EU DEU FRA EST LVA Years
Source:
Foreign-born Native-born 50 60 70 80 90 100 BEL ITA FRA NLD LVA DEU DNK AUT FIN OECD-EU ESP NOR LUX IRL EST SWE CZE POL ISL %
Foreign-born Native-born
Overqualification rates
Percentage of the highly educated population aged 15-64 not in education, 2021
Over-qualification refers to highly educated individuals (ISCED 2011 Levels 5-8) who work in a job that is ISCO-classified as low- or medium-skilled (ISCO Levels 4-9).
Source: OECD, “Settling In 2023: Indicators of Immigrant Integration”, forthcoming.
0 10 20 30 40 50 60 70 0 10 20 30 40 50 60 70 Total
Settled
EU-born
% % Native-born Foreign born
Recent (less than 10 years)
(at least 10 years)
Non-EU born (foreign-educated)
Establishing a one-stop shop would ease skills recognition and would make language training courses more effective
18
Score-point difference in reading performance associated with immigrant background
After accounting for gender and socio-economic background
After accounting for gender and socio-economic background
Score difference
Score difference
Note: Socio-economic background refers to students’ and schools’ socio-economic profile.
Source: OECD, PISA 2018 database.
-100 -80 -60 -40 -20 0 -80 -60 -40 -20 0 FIN ISL SWE DNK NOR OECD
Implementation of measures for students with a diverse linguistic background is welcome and needs to continue
19
Teachers need more training in multicultural education
Teachers with more than 10% of students whose first language is different from the language of instruction, 2018
% of teachers
Source: OECD, Teaching and Learning International Survey (TALIS) database.
% of teachers
0 5 10 15 20 25 30 35 40 45 0 5 10 15 20 25 30 35 40 45 FIN OECD DNK NOR ISL SWE
20
Overcrowding rate by country of birth
Aged 18 or older, 2018
The overcrowding rate is the share of the population living in a household that does not have enough rooms at its disposal as defined by Eurostat in its Living Conditions Survey.
Source: Eurostat, Living Conditions Survey.
0 10 20 30 40 50 60 0 10 20 30 40 50 60 IRL NLD DEU EST LUX ESP BEL PRT LTU FIN FRA ISL NOR HUN OECD DNK EU27 CZE SVN SWE AUT POL SVK LVA ITA GRC % of population % of population Foreign-born Native-born
Better integrating migrants also requires meeting their housing needs
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