The Icelandic Economyºtgáfa/kynningar/ie2019 - presentation.pdf · Iceland‘s search and rescue...

Current State, Recent Developments and Future Outlook2018 edition

The Icelandic Economy

Á eftir að uppfæra

Iceland Chamber of Commerce | 2

KEY FACTSFOREWORD

1. ECONOMIC LANDSCAPE

2. INSTITUTIONAL FRAMEWORK

3. FINANCIAL SECTOR

4. DOMESTIC SECTOR

5. RESOURCE SECTOR

6. INTERNATIONAL SECTOR

7. FUTURE PROSPECTS

Front page artwork: Inga Dóra (Eins og var)

34

5

19

29

37

46

54

61

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TABLE OF CONTENTS

http://www.vi.is/


The total land area is 103,000 km2

and the population is 360,384

Iceland‘s parliament, Althingi is theoldest surving parliament in the world, founded in 930 AD

Former president Vigdís Finnbogadóttir became the first democratically elected female headof state in 1980

Iceland is a member of NATO butdoes not have any military forces

Iceland‘s search and rescue services are solely volunteer-run

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%

Did you know? Key facts about the economy

KEYFACTS


Ásta S. FjeldstedManaging Director,Iceland Chamberof Commerce

“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 when its three major banks, which assets amounted to over 9-fold GDP collapsed in the 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.

FOREWORDÁSTA S. FJELDSTED


Current Landscape ECONOMIC

LANDSCAPE1


QatarMacao SARLuxembourgSingaporeBrunei DarussalamIrelandNorwayUnited Arab EmiratesKuwaitSwitzerlandHong Kong SARUnited StatesSan MarinoNetherlandsSaudi ArabiaICELANDTaiwan Province of ChinaSwedenGermanyAustraliaAustriaDenmarkBahrainAustriaCanadaBelgiumOmanFinlandFranceUnited KingdomMaltaJapanKoreaSpainNew ZealandCyprusPuerto RicoItalyArubaIsrael

Iceland has outgrown most developed countries in recent years

Figure 1.1

Country rankings, GDP per capita (PPP1 adjusted)

Sources: IMF World Economic Outlook; Iceland Chamber of Commerce

1980 ranking 2016 rankingUnited Arab EmiratesQatarSaudi ArabiaKuwaitLibyaBahrainSwitzerlandLuxembourgNorwayUnited StatesCanadaNetherlandsDenmarkGermanyAustriaBelgiumFranceICELANDItalySwedenAustraliaFinlandThe BahamasGreeceGabonSingaporeNew ZealandUnited KingdomJapanOmanSpainVenezuelaTrinidad and TobagoPuerto RicoIrelandIsraelHong Kong SARHungaryArgentinaCyprus

1

1 Purchasing Power Party

40

30

10

20

1986 199819921980 2004 2010 2018


Iceland ranks highly in numerous competitive indicesFigure 1.2

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

Source: Respective websites

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

Social Progress Index (SPI)

Gender Equality (WEF)

6

11

203140

180

2

Media Freedom (Freedom House)

Global Peace Index (IEP, vision of humanity)2

125

Democracy Index (The Economist)

Environmental Performance Index (YALE)

Human Development (UN)

Global Competitiveness Index (WEF)

1111Economic Freedom (HF)14

Competitiveness (IMD)

Corruption (Transparency Int.)20Global Innovation Index (INSEAD)20Property Rights Index (IPRI)

149

21Doing Business (WB)

180

2424

47

9

167163

146189

Globalization (KOF)

180

188

126

63

199

Iceland’s ranking # of countries ranked


Iceland‘s competitiveness has slowly but steadily been improving this decade

Figure 1.3

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

Sources: IMD Business School; Iceland Chamber of Commerce

Iceland‘s overallcompetitiveness

Strengths Weaknesses Iceland’s position

Economicperformance1 High

employmentSize of the economy

54/63

Governmentefficiency

2 Societal framework

Taxes 15/63

Businessefficiency

3 Attitudes and values

Finances 19/63

Infrastructure4Basic infrastructure

Scientific infrastructure

13/63

31 26 29 25 24 23 20 24 20

2011 2012 2013 2014 2015 2016 2017 2018 2019


GDP growth (Percent)

Figure 1.4

Sources: Statistics Iceland; Central Bank of Iceland (Monetary Bulletin 2019/2); Iceland Chamber of Commerce

The economy has been experiencing robust growth but a mild recession is anticipated this year

2011

2009

2004

2003

-0.4

2017

2007

2001

0.7

2002

2008

2006

2005

2010

2012

2013

6.6

-3.4

2014

2016

2015

2018

2019

2020

2021

3.94.6

2.3

6.3

8.0

5.2

9.4

2.0

-6.8

1.9 1.3

4.1

2.1

4.7 4.6

2.4 2.6

Actual Projected


Annual GDP growth 2014 to 2018 (Percent)

Iceland‘s economy was one of the fastest growing in theworld in 2016, but growth has since slowed

Figure 1.5

Sources: OECD statistics; Iceland Chamber of Commerce; Statistics Iceland

2.11.8

2.6

20162014

1.81.81.2

1.9

2015 2017 2018

1.4

2.2

4.7

2.12.6

6.6

1.72.0

4.6

2.4 2.4

4.6

2.3

Iceland Other Nordics Euro area OECD total


Corporate and Household Debt (Percent of GDP)

Figure 1.6

Source: Central Bank of Iceland (Monetary Bulletin 2019/2)

Private debt declined significantly after the financial crisis but has increased slightly in the last two years

0

50

100

150

200

250

300

350

2004 2008 2010 20182006 20142012 2016

158

233

347

270

164

Corporate debt Household debt


Unemployment Rate (Percent; yearly average)

Figure 1.7

Source: Statistics Iceland

Unemployment is rising again after a gradual decline since 2010

1 First quarter

0

1

2

3

4

5

6

7

8

9

2009 20132001 2011

5.4

2003 20152005 2007 2017 20191

3.0 3.0

7.6

2.73.0


Annual Inflation Rate (Percent)

Figure 1.8

Sources: Central Bank of Iceland; Statistics Iceland; Iceland Chamber of Commerce

Inflation has been near the Central Bank’s inflation target for over five years

-5

0

5

10

15

20

25

2006

2000

2001

2007

2005

2002

2003

21.020

04

2015

2008

18.6

2009

2010

2011

2012

2018

2013

2014

2016

2017

2019

Inflation Central Bank’s inflation targetInflation excluding housing


Interest rates in Iceland appear to be converging to other developed economies

Figure 1.9

Sources: Central Bank of Iceland; Iceland Chamber of Commerce

Central Bank Key Interest Rates (Percent)

5.0%

0.5%

2.0%

2011 20142013 2016

6.0%

2017 20182015 201920120.0%

1.0%

1.5%

2.5%

3.0%

3.5%

4.0%

4.5%

5.5%

2.50%

0.00%

3.75%

Iceland Euro area USA


The devaluation of the Króna balanced out a persistent current account deficit and supported a surplus since 2009

Figure 1.10


Current Account Balance1 (Percent of GDP)

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.

-25

-20

-15

-10

-5

0

5

10

20102000 2002 2006 20082004 2012 2014 2016 2018 2020

+5.2%

-10.9%

Central Bank forecastCurrent account balance Average 2000-2008

Average post crisis


Even though the Króna has depreciated in the last two years, the real exchange rate remains high

Figure 1.11

Source: Central Bank of Iceland

EUR/ISK and Real Exchange Rate (A higher value indicates a weaker Icelandic Króna)

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

0

100

150

2000 2002 2004 2008 2012 2014 2016 20182010

200

2006

141

+107%

EURISK exchange rate Real exchange rate1


Iceland‘s Net International Investment Position (NIIP) (Percent of GDP)

Figure 1.12

Source: Central Bank of Iceland; Iceland Chamber of Commerce

Iceland’s net foreign position has transformed with Iceland becoming a net lender to the rest of the world

1 First quarter of 2019

-700

-600

-500

-400

-300

-200

-100

0

100

20031995 20011997 20071999 2005 2009 2011 2013 2015 2017

-105

20191

-45

-654

-448

-375

-5

4 21

NIIP w/o estates Failed banks estates


Iceland‘s Exports by Sectors1 (Bn. ISK at 2017 prices)

Figure 1.13

Sources: Statistics Iceland; Iceland Chamber of Commerce

Iceland has historically been dependent on fishing but three other export foundations have since emerged

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.

0

1,000

600

200

400

800

1,200

1,400

18%53%

1995

19%

1997 2000 2003 2006 2009

24%

2012 2015

39%

2018

International sector11 EnergyTourism1 Seafood


INSTITUTIONALFRAMEWORK2


Figure 2.1

Source: Althing

Eight parties have representatives in Althingi – Iceland‘s ParliamentIllustrative; Parliamentary parties, number of MP’s and ministerial posts

Independence Party

Progressive Party

Left Green Movement

Parliamentary Parties Regular MP‘s

People‘s Party

Center Party

Pirate Party

Social Democratic Alliance

Liberal Reform Party

Majority

Minority

Prime Minister

Minister of Education, Science and CultureMinister of Justice

Minister of Health

Minister of Transport and Local Government

Speaker of Althingi

Minister of Financeand EconomicMinister of Fisheriesand AgricultuureMinister for Foreign AffairsMinister of Tourism, Industry and InnovationMinister of Social Affairsand ChildrenMinister for the Environment and Natural Resources

Ministers & Speaker


Majorities in the Seven Largest Municipalities (Parties by list letter codes)

Figure 2.4

Source: Iceland Chamber of Commerce

Most mayors in the largest municipalities have served longer than one term

7

5

5

2

3

8

4

2

1

1

2

2

1

2

2

1

1

5

5

11

5

5

3

4

Dagur B. Eggertsson – since 2014

Ármann Kr. Ólafsson – since 2014

Rósa Guðbjartsdóttir – since 2018

Ásthildur Sturludóttir – since 2018Akureyri

Municipality Council seats by party Mayor

Reykjavík

Kópavogur

Hafnarfjörður

Reykjanesbær

Garðabær

Mosfellsbær

Kjartan Már Kjartansson – since 2014

Gunnar Einarsson – since 2005

Haraldur Sverrisson – since 2007

S P C DV B L Y Minority

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.


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

Figure 2.3


The EEA member states are some of Iceland‘s largest trading partners

1 Total share of imports and exports combined

55

15

3 2 2 1 1 1 1 1

China

10

EEA CanadaUSA

65

Australia JapanKSA Turkey Brazil Switzerland

Other states Britain EEA states


General Government Debt1 (Percent of GDP)

Figure 2.4

Source: Central Bank of Iceland (Economic Indicators June 2019)

Public debt has decreased significantly in recent years and is primarily domestic

1 Central Bank forecast after 2018

37

27

92

38

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

20162014200820062000 2002 20102004 2012 2018 2020

Gross debt Net debt


General Government Tax Revenues in 20161 (Percent of GDP)

Figure 2.5

Sources: OECD; Statistics Iceland

Taxes on personal income are high while social security conbtributions are low due to private pensions

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

8

3

9

0

2

11

14

3

3

0

2

12Goods and services

Payroll

Personal income

Corporate profits

Social security contributions

Tax on property

OECD Iceland


General Government Spending in 20161 (Percent of GDP)

Figure 2.6

Sources: OECD; Statistics Iceland

Public spending is relatively high in Iceland with the exception of defence and social protection

6

1

2

4

1

1

6

1

5

16

8

0

1

5

1

1

8

3

8

10

Public order and safety

General public services

Housing and community

Defence

Education

Economic affairs

Environment

Recreation, culture and religion

Health

Social protection

OECDIceland


Key Taxes in Iceland

Figure 2.7

Sources: PwC; Directorate of Internal Revenue; Iceland Chamber of Commerce, Ministry of Finance

The Icelandic tax system relies heavily on consumptionand labor income

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.

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

New lower bracket of 33% introduced in 2020.

Unchanged since 2011 when it was increased from 18% to 20%

Increased from 20% to 22% in 2017. Tax base is under review.

Dividends / Capital gains

Tax Rate Recent and proposed changes

11%

37%

20%

22%

24%

46%

6.6%

VAT1

Labour income2

Corporate tax

Lowered by 0.25 pp in 2019 and a further 0.25 pp is planned

Payroll tax

Higher bracketLower bracket


Exchange Rate Fluctuations Against the Euro (Annualised volatility)

Figure 2.8

The Icelandic Króna has been one of the most volatilecurrencies in the developed world

1 From 1st of January 2010 till 13th of March 20172 From 13th of March 2017 till 14th of July 2019


21%

13%

11%

8% 8%7%

5%

12%

10%9% 8%

7%

10%

8%7% 7% 6% 6%

Swedish KronaBritish PoundIcelandic Króna Norwegian Krona

Japanese Yen US Dollar

Free-floating (2003-2009)Period under capital controls (2010-2017)1

Post outflow controls (2017-July 2019)2


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

Figure 2.9

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

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

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

2005 20132007 2009 201922011 2015 2017

Total FX reserves Net FX reserves1


FINANCIALSECTOR3


The Icelandic banking system is less leveraged, much smaller and primarily serves the domestic market

Figure 3.1


Aggregated Deposit-Taking Bank’s Balance Sheet1 (Percent of GDP)

144% 68%

325% 475%

110%

180%

367% 130%

94%

0%

600%

200%

400%

800%

1,000%

Assets Liabilities

3% 22%13%

23%17%

103%

22%

67%

0%

20%

40%

60%

80%

100%

120%

140%

Assets

3%

Liabilities

Domestic lending/depositsOther domestic

Foreign lending/depositsOther foreign

Equity

September 2008 May 2019

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.


Iceland‘s Credit Ratings (Sovereign debt; Moody‘s, Fitch and S&P rating)

Figure 3.2

Iceland‘s credit rating has improved in recent years but is stagnant due to rising uncertainties


Speculative grade

20192012 2013 2014 2015 2016 2017 2018

Ba1/BB+

Baa3/BBB-

Baa1/BBB+

Baa2/BBB

A3/A-

A2/A

A1/A+

Aa3/AA-

Aa2/AA

Aa1/AA+

Aaa/AAA

0.9%0.7%

2.2%Investmentgrade

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

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


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

Figure 3.3

Domestic assets appreciation has recently slowed down

Sources: GAM Management; Registers Iceland; Statistics Iceland; Iceland Chamber of Commerce

20152014 2016

180

2018 20190

100

140

120

2012 2017

160

20112010

200

2013

+10%

+0%

+9%

Real estateBondsEquity

YoY real return June 2019


New Investment Inflows (Bn. ISK)

Figure 3.4

Restrictions on capital inflows (SRR), which have now been lifted, have influenced the composition of inflows

1 SRR = Special Reserve Requirement

Sources: Central Bank of Iceland (Economic Indicators June 2019); Iceland Chamber of Commerce

7

2015

22

2016 20182017

43

23

5

14

2019

62

4

138

2021

18 15

7

-6

11

Total outflowsGovernment bonds inflowsListed shares inflows

Other inflowsNet

Plan to liftcapital controlsannounced in June 2015

SRR on fixed-incomeinvestment1 SRR abolished1


Private Pension Assets 2016 (Percent of GDP)

Figure 3.5

Despite a young population, Iceland has relatively one of the largest pension systems in the world

Source: OECD Global Pension Statistics

208%

184%

155%

149%

149%

145%

130%

105%

95%

90%

Iceland

Denmark

Australia

Netherlands

Canada

United States

Switzerland

UK

Sweden

Chile


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

Figure 3.6

Iceland‘s population is the second youngest in the European Economic Area

Source: Eurostat

21%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Nor

way

Italy

Aus

tria

Finl

and

Swed

en

Gre

ece

Fran

ce

Port

ugal

Bulg

aria

Ger

man

y

Uni

ted

King

dom

Latv

ia

Switz

erla

nd

Croa

tiaEs

toni

aD

enm

ark

Lith

uani

aCz

echi

a

Irela

nd

Slov

enia

Slov

akia

Spai

nBe

lgiu

m

Cypr

us

Net

herla

nds

Hun

gary

Mal

ta

Rom

ania

Liec

hten

stei

nPo

land

Luxe

mbo

urg

Icel

and


Pension Fund’s Total Assets (Billion ISK at 2018 prices)

Figure 3.7

Pension funds are outgrowing the economy due to decent returns and high premiums

Sources: Central Bank of Iceland; Statistics Iceland; Iceland Chamber of Commerce

3,000

1,000

0

2,000

1,500

500

2,500

3,500

4,000

4,500

2,796

1998 2000 2002 2004 2006 2008 2010 2012 20182014 2016

1,032

2,321

4,239

2,336

Domestic debtDomestic equity

Other domesticForeign equityForeign debt and other


DOMESTICSECTOR4


Composition of the Icelandic Economy (Percent of GDP)

Figure 4.1

The domestic sector accounts for about two thirds of the economy

Sources: Statistics Iceland; McKinsey & Company; Iceland Chamber of Commerce

Domestic Sector

63%

Resource Sector

25%

International Sector

12%

FinancialServices

Culture & Arts

Public Services Wholesale & Retail

Real Estate

Tourism & Transportation

Agriculture

Electricity & Water

Fisheries Metal Production

Construction

IT & Communications

Other Services

Other Manufacturing

Food Production


Figure 4.2

Productivity has been increasing in Iceland, putting it above Finland in terms of GDP per hour worked

Source: OECD

GDP per Hour Worked in 2016 (US dollars, constant prices 2010 (PPP))

81

6562

57 55 54 53

0

10

20

30

40

50

60

70

80

90

FINDNKNOR SWE ISL Euro area GBR


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)

1 All sector definitions are according to NACE V.22 Mining and quarrying; manufacturing; electricity, gas, steam and air conditioning supply; water supply; sewerage, waste management and remediation activities

66%

42%

38%

38%

36%

32%

19%

18%

14%

14%

7%

0%

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

Wholesale and Retail Trade

IT and Communications

Accommodation and Food

Agriculture, Forestry and Fishing

Transportation and Storage

Arts and Entertainment

Construction

Industry2

Rental and Leasing Services

Scientific and Technical Activities

Public Services

Financial and Insurance Activities

19.5% Average


Wage Growth and Unemployment (Percent of workforce, percent change)

Figure 4.4

The labour market had a declining unemployment rate amid very high wage growth but that trend is now shifting

1 Measured as yearly change in the Wage Index


0%

2%

4%

6%

8%

10%

12%

201220112006 2007 201020092008 2013 2014 2015 2016 2017 2018

Wage growth1 Unemployment


Net Changes in Labour Force (Percent change by background)

Figure 4.5

Iceland has experienced a strong influx of foreign labour in recent years


2,3

2013201020092007

4,7

2006 2008 20142011 2012 2015 2016

3,0

2017 2018

3,0

4,7

0,2

-8,4

-1,7

0,91,7

2,5

4,7 4,6

Icelandic Immigrants


Wage Increases in the Living Standard Agreement (USD1)

Figure 4.6

The Living Standard Agreement has multiple components with emphasis on absolute wage increases

Sources: Confederation of Icelandic Enterprise

Basic Monthly Minimum Wage Increases

Minimum wage

1362019

1922020

1922021

2002022

2,400

Min. Wage 2022 3,120

Yearly Add-Ons Linked to Economic Performance

+1.0%

+1.5%

+2.0%

+2.5%

+3.0%

GDP/Cap Wages

+24

+44

+64

+84

+104

Income Guarantee

If the wage indexincreasesproportionately morethan the minimumwage, the minimumwage automaticallyincreases to offset thedifference.

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


Housing Prices and Investment (Indices (Jan. 97=100) until Jun. 18 and b. ISK)

Figure 4.7

Housing prices have increased rapidly in the last few years but since mid-2017 the market has slowed down

Sources: Statistics Iceland; Central Bank of Iceland; Registers Iceland; Iceland Chamber of Commerce

1 Housing prices/Disposable income per individual2 Billion ISK at 2017 prices, number for June 2018 is CBI’s forecast for the whole year3 Inflation and housing prices for June 2019 and Investment and income based on CBI forecast for the year

225243

149

0

100

200

300

2008

2003

1997

1998

2002

1999

2000

2001

2004

2005

2006

135

2018

2007

2009

2010

2017

2011

2012

2016

2013

2014

2015

2019

3

Real prices Price-to-income1 Residential housing investment2


Population and Housing Growth (Percent change YoY)

Figure 4.8

A large gap has emerged between housing construction and population growth which finally appears to be closing

Sources: Statistics Iceland; Registers Iceland; Central Bank of Iceland; Iceland Chamber of Commerce

-0.5%

1.5%

-1.0%

0.0%

4.5%

0.5%

1.0%

2.0%

4.0%

2.5%

3.0%

3.5%

1998

1995

1996

1997

1999

2009

2007

2005

2001

2002

2003

2011

2004

2018

2006

2008

2010

2012

2013

2014

2015

2016

2017

2000

Housing unitsHousing adjusted for Airbnb

20 years old and older inhabitants


RESOURCESECTOR5


Keflavík Airport Passengers (Total and percent change)

Figure 5.1

Tourism is having a set-back this year after double-digit growth for almost a decade

Sources: Statistics Iceland; Registers Iceland; Central Bank of Iceland; Iceland Chamber of Commerce

1 ISAVIA‘s forecast in June 2019.

-30%

-20%

-10%

0%

10%

20%

30%

40%

1.5

0.0

2.5

0.5

1.0

2.0

2008 2009 2013 20172007 201912010 20182011

1.9

2012 2014 2015 2016

0.5

1.8

2.3

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

Total passengers YoY change (l.axis)


Relative Prices of Restaurants and Hotels (European Union = 100)

Figure 5.2

Consumer prices in Iceland are among the highest in Europe

Sources: Eurostat; Central Bank of Iceland; Iceland Chamber of Commerce

100

120

140

160

180

0

2009

2003

Jun.

201

9

2005

2006

2004

2011

2007

2008

2014

2010

2012

2013

2015

2016

2017

2018

EUDenmark

SwitzerlandFinlandSweden

IcelandNorway


Card Turnover Per Tourist (Year over year change)

Figure 5.3

Depreciated Króna and more spending per tourist weighs against the drop in the number of tourists

Sources: Centre for Retail Studies; Statistics Iceland; Iceland Chamber of Commerce

-30%

20%

-20%

0%

-10%

30%

10%

40%

Jan.

19

Jan.

16

Mar

. 16

May

. 16

Jul.

16

Sep.

16

Nov

. 16

Jan.

17

Mar

. 17

May

. 17

Jul.

17

Sep.

17

Nov

. 17

Jan.

18

Mar

. 18

May

. 18

May

. 19

Jul.

18

Sep.

18

Nov

. 18

Mar

. 19

Current exchange rate Constant exchange rate


Electricity Consumption (MWh per capita and % from renewables1)

Figure 5.4

Iceland is the largest producer of renewable power per capita in the world

Sources: World Bank; Iceland Chamber of Commerce

1 World Bank only publishes distribution of electricity by output, not consumption, so the distributionbetween renewables and non-renewables might be slightly inaccurate

20

15

45

0

10

30

5

55

40

25

35

50

KOR

USA

0%

63%

100%

KWT

ISL

FIN

0%

QAT

0% 32%

LUX

0%

SWE

CAN

13% 0%

BHR

ARE

2%

BRN

NO

R

63%

14%

AUS

0%

SAU

98%

44%

Renewable resources Non-renewable resources


Potential Increase in Profitability by Storing Data in Iceland (Profits; illustrative)

Figure 5.5

Favorable climate and affordable, renewable energymakes Iceland an attractive location for data centers


Data Storedin Europe

Cooler Climate

Lower Electricity

Prices

IncreasedSales due to

Green Energy

Data Storedin Iceland


Seafood Industry (Investment and Productivity)

Figure 5.6

Iceland’s seafood industry has seen productivity gains amidst erratic business environment


0

20

40

60

80

100

120

140

160

180

200

0

5

10

15

20

25

30

35

40

45

50

55

2001

1998

2011

2013

1997

1999

2000

2002

2006

2003

2004

2005

2007

2008

2009

2010

2012

2017

2014

2018

2015

2016

Labour productivity (l. axis, index 1997=100)1 Investment (r. axis b. ISK at 2018 prices)

1 Working hours and thus productivity has a break in series in 2008


Aquaculture Production (Thousand tons)

Figure 5.7

Aquaculture is expanding fast, salmon production in particular


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

25

15

30

0

5

10

20

2009 20122010 2019120142008 2011

5

2013 2015 2016

21

2017 2018

5 557 7

8 8

15

19

26

Salmon Trout and arctic char Other


INTERNATIONALSECTOR6


Export Requirements Along a 3% Economic Growth Path (Bn. ISK; Illustrative2)

Figure 6.1

New exports in knowledge based goods and services are needed to support a balanced long-term growth trajectory1

Sources: McKinsey & Company, Statistics Iceland, Central Bank of Iceland, Iceland Chamber of Commerce

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.

500

250

0

750

1,000

1,250

1,500

1,750

2,000

2,250

2017 2022 2027 2032 2037

New Exports

Other GoodsOther Services

Tourism

Energy-Intensive Industry

Fisheries


Government Contributions to R&D Grants (Real prices, Index 2004 = 100)

Figure 6.2

Government grants towards R&D have increased manyfold in the last 15 years

Sources: The Icelandic Centre for Research

214 224

613

122 117

307

0

100

200

300

400

500

600

700

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

376

204

Icelandic Research FundTechnology Development Fund


R&D Expenditure by Sector (PPP Million USD)

Figure 6.3

Investment in R&D has been steadily increasing over the last few years

Sources: Statistics Iceland, OECD, Iceland Chamber of Commerce

91 96 104 115 126

136178

234241

257

2015

1717

20162013 2014

1817 17

2017

243

292

355373

400

Corporations Other public institutions Universities


Government R&D Tax Credits and/or Rebates (Percent by bracket, million USD)

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

Sources: Statistics Iceland, OECD, Iceland Chamber of Commerce

Britain

43,5

Iceland

Australia

Austria

Ireland

France

Canada

Netherlands

Portugal

33,0

Chile

Norway

Denmark

37,5

30,0

20,0

35,0

32,0

14,0

20,0

32,5

35,0

22,0

4,4

3,8

3,3

3,0

2,0

1,5

1,4

1,0

0,6

0,5

0,4

0,2

CountryRebate Percentage Absolute Cap1

Million USDTax Rebate10m USD Investment2

71,0

5,0

1,7

3,0

1,2

0,9

Lower Higher

No Cap

No Cap

No Cap

No Cap

No Cap

No Cap

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.


Figure 2.20

2015 was the breakout year for the VC industry in Iceland


1997

New Business Venture FundQuasi-Public fund56m USD

Frumtak IPrivate Fund52m USD

2008 2015

Frumtak IIPrivate Fund38m USD

BrunnurPrivate Fund30m USD

Eyrir SprotarPrivate Fund34m USD

2017

Crowberry CapitalPrivate Fund37m USD

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


STEM Degree Graduates as Percantage of Total Number of Graduates (Percent)

Figure 6.6

Iceland has a relatively low proportion of students graduating with STEM degrees

Sources: INSEAD – Global Innovation Index 2018, Iceland Chamber of Commerce

30 30 30 29 2827 26 26 26 25 25 25 24 24 24 23 23 23 23

21 21 21 21 2018 17

16 1614 14

Lithuania

Sweden

Britain

Austria

Greece

Romania

Finland

Portugal

France

Estonia

Slovenia

Italy

Croatia

Cyprus

Czech Republic

IrelandSw

itzerlandSpain

Iceland

Bulgaria

Hungary

Poland

SlovakiaN

orway

Denm

arkLatvia

Malta

Belgium

Netherlands

Luxembuorg

European Countries Nordic countries Iceland


FUTUREPROSPECTS7


The Iceland Growth Forum had 37 reform proposals to support a long term sustainable growth trajectory

Figure 7.1

Source: Iceland Growth Forum presentation

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


The Four Focus Lenses of Disruptive Trends

Figure 7.2

To capture the disruptive trends that are shaping theworld, the Chamber will operate under four focus lenses


Support and grow knowledge driven export sectors of the Icelandic economy

Ensuring that all generation’s talents match the need of the society

• Determining how business leaders can navigate through present challenges

Maximize value creation of Icelandic resource industries

Protect nature with focus on productivity and sustainability

• Leverage Iceland’s unique situations to fight climate change

Boost global position of Iceland as the country to base and do business in

• Safeguarding Iceland’s position in the EEA and openness to trade

• Focus on business development in new markets

ExamplesLenses

Embrace technological changes to drive productivity improvements across sectors

Improve services and achieve cost efficiency through digitization

Use big data insights to connect with customers and transform operations

Digitisation

Regeneration

Environmental Sustainability

Global Connections


Infrastructure Stock and Investment (Broadly defined1)

Figure 7.3

More investment in infrastructure is required to soon reach previous infrastructure levels


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

0

10

20

30

0%

5%

10%

15%

20%

25%

30%

35%

40%20

02

2050

1992

2008

1990

1994

2006

2000

1996

2044

2004

25.4

2010

2048

2012

2014

1998

2018

23.0

2046

2020

25.4

2022

2024

2026

2028

2030

2032

2038

2034

2036

2040

2042

2016

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

Projection


Capital Stock in Roads and Bridges (Million ISK per car1)

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


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

1994

1992

0.0

1996

1990

2000

2008

2010

2014

2012

2016

2018

20061.3

1.5

1.4

2004

1.6

2002

1.7

1998

-13%

Capital stock in roads per car 1990-2017 average


England-France70km2,000 MW

SwePol245km600 MW

Konti-Skan 1&2149 km550 MW

Interconnectors in Northern Europe (Length and capacity)

Figure 7.5

An interconnector from Iceland to the UK would be one of the longest in Europe and requires significant investment

Sources: Kvika banki; GAM Management; Iceland Chamber of Commerce

Fenno-Skan200 km800 MW

BritNed260km1,000 MW

NorNed580km700 MW

Baltic Cable262 km600 MW

Iceland-UK~1,000 km800-1,200 MW


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