The Icelandic Economy Current State, Recent Developments and Future - - PowerPoint PPT Presentation

Current State, Recent Developments and Future Outlook 2018 edition

The Icelandic Economy

Á eftir að uppfæra

Iceland Chamber of Commerce | 2

KEY FACTS FOREWORD

• 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)

3 4 5 19 29 37 46 54 61 ACCESS THE FULL REPORT HERE

TABLE OF CONTENTS

Iceland Chamber of Commerce | 3

• The total land area is 103,000 km2

and the population is 360,384

• Iceland‘s parliament, Althingi is the
• ldest surving parliament in the

world, founded in 930 AD

• Former president Vigdís

Finnbogadóttir became the first democratically elected female head

• f 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

• 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

KEY FACTS

Iceland Chamber of Commerce | 4

Ásta S. Fjeldsted Managing Director, Iceland Chamber

• f 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.

FOREWORD ÁSTA S. FJELDSTED

Iceland Chamber of Commerce | 5

Current Landscape

ECONOMIC LANDSCAPE

1

Iceland Chamber of Commerce | 6

Qatar Macao SAR Luxembourg Singapore Brunei Darussalam Ireland Norway United Arab Emirates Kuwait Switzerland Hong Kong SAR United States San Marino Netherlands Saudi Arabia ICELAND Taiwan Province of China Sweden Germany Australia Austria Denmark Bahrain Austria Canada Belgium Oman Finland France United Kingdom Malta Japan Korea Spain New Zealand Cyprus Puerto Rico Italy Aruba Israel

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 ranking

United Arab Emirates Qatar Saudi Arabia Kuwait Libya Bahrain Switzerland Luxembourg Norway United States Canada Netherlands Denmark Germany Austria Belgium France ICELAND Italy Sweden Australia Finland The Bahamas Greece Gabon Singapore New Zealand United Kingdom Japan Oman Spain Venezuela Trinidad and Tobago Puerto Rico Ireland Israel Hong Kong SAR Hungary Argentina Cyprus 1

1 Purchasing Power Party

40 30 10 20 1986 1998 1992 1980 2004 2010 2018

Iceland Chamber of Commerce | 7

Iceland ranks highly in numerous competitive indices

Figure 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 1 1 203 140 180 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) 11 11 Economic Freedom (HF) 14 Competitiveness (IMD) Corruption (Transparency Int.) 20 Global Innovation Index (INSEAD) 20 Property Rights Index (IPRI) 149 21 Doing Business (WB) 180 24 24 47 9 167 163 146 189 Globalization (KOF) 180 188 126 63 199 Iceland’s ranking # of countries ranked

Iceland Chamber of Commerce | 8

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 overall competitiveness Strengths Weaknesses Iceland’s position Economic performance

1

High employment Size of the economy 54/63 Government efficiency

2

Societal framework Taxes 15/63 Business efficiency

3

Attitudes and values Finances 19/63 Infrastructure

4

Basic infrastructure Scientific infrastructure 13/63 31 26 29 25 24 23 20 24 20 2011 2012 2013 2014 2015 2016 2017 2018 2019

Iceland Chamber of Commerce | 9

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 3.9 4.6 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

Iceland Chamber of Commerce | 10

Annual GDP growth 2014 to 2018 (Percent)

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

Figure 1.5

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

2.1 1.8 2.6 2016 2014 1.8 1.8 1.2 1.9 2015 2017 2018 1.4 2.2 4.7 2.1 2.6 6.6 1.7 2.0 4.6 2.4 2.4 4.6 2.3 Iceland Other Nordics Euro area OECD total

Iceland Chamber of Commerce | 11

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

50 100 150 200 250 300 350 2004 2008 2010 2018 2006 2014 2012 2016 158 233 347 270 164 Corporate debt Household debt

Iceland Chamber of Commerce | 12

Unemployment Rate (Percent; yearly average)

Figure 1.7

Source: Statistics Iceland

Unemployment is rising again after a gradual decline since 2010

1 First quarter

1 2 3 4 5 6 7 8 9 2009 2013 2001 2011 5.4 2003 2015 2005 2007 2017 20191 3.0 3.0 7.6 2.7 3.0

Iceland Chamber of Commerce | 13

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

5 10 15 20 25 2006 2000 2001 2007 2005 2002 2003 21.0 2004 2015 2008 18.6 2009 2010 2011 2012 2018 2013 2014 2016 2017 2019 Inflation Central Bank’s inflation target Inflation excluding housing

Iceland Chamber of Commerce | 14

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 2014 2013 2016 6.0% 2017 2018 2015 2019 2012 0.0% 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

Iceland Chamber of Commerce | 15

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

Figure 1.10

Sources: Central Bank of Iceland; Iceland Chamber of Commerce

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

5 10 2010 2000 2002 2006 2008 2004 2012 2014 2016 2018 2020 +5.2%

• 10.9%

Central Bank forecast Current account balance Average 2000-2008 Average post crisis

Iceland Chamber of Commerce | 16

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

100 150 2000 2002 2004 2008 2012 2014 2016 2018 2010 200 2006 141 +107% EURISK exchange rate Real exchange rate1

Iceland Chamber of Commerce | 17

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

100 2003 1995 2001 1997 2007 1999 2005 2009 2011 2013 2015 2017

• 105

20191

• 45
• 654
• 448
• 375
• 5

4 21 NIIP w/o estates Failed banks estates

Iceland Chamber of Commerce | 18

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.

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 Energy Tourism1 Seafood

Iceland Chamber of Commerce | 19

INSTITUTIONAL FRAMEWORK

2

Iceland Chamber of Commerce | 20

Figure 2.1

Source: Althing

Eight parties have representatives in Althingi – Iceland‘s Parliament

Illustrative; 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 Culture Minister of Justice Minister of Health Minister of Transport and Local Government Speaker of Althingi Minister of Finance and Economic Minister of Fisheries and Agricultuure Minister for Foreign Affairs Minister of Tourism, Industry and Innovation Minister of Social Affairs and Children Minister for the Environment and Natural Resources

Ministers & Speaker

Iceland Chamber of Commerce | 21

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 2018 Akureyri 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 D V 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 Chamber of Commerce | 22

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

Figure 2.3

Sources: Statistics Iceland; Iceland Chamber of Commerce

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 Canada USA

65

Australia Japan KSA Turkey Brazil Switzerland

Other states Britain EEA states

Iceland Chamber of Commerce | 23

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% 2016 2014 2008 2006 2000 2002 2010 2004 2012 2018 2020 Gross debt Net debt

Iceland Chamber of Commerce | 24

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 2 11 14 3 3 2 12 Goods and services Payroll Personal income Corporate profits Social security contributions Tax on property OECD Iceland

Iceland Chamber of Commerce | 25

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 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 OECD Iceland

Iceland Chamber of Commerce | 26

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 consumption and 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 bracket Lower bracket

Iceland Chamber of Commerce | 27

Exchange Rate Fluctuations Against the Euro (Annualised volatility)

Figure 2.8

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

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

21% 13% 11% 8% 8% 7% 5% 12% 10% 9% 8% 7% 10% 8% 7% 7% 6% 6% Swedish Krona British Pound Icelandic 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

Iceland Chamber of Commerce | 28

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 2013 2007 2009 20192 2011 2015 2017 Total FX reserves Net FX reserves1

Iceland Chamber of Commerce | 29

FINANCIAL SECTOR

3

Iceland Chamber of Commerce | 30

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

Figure 3.1

Sources: Central Bank of Iceland; Iceland Chamber of Commerce

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/deposits Other domestic Foreign lending/deposits Other 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 Chamber of Commerce | 31

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

Sources: Central Bank of Iceland; Iceland Chamber of Commerce

Speculative grade 2019 2012 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% Investment grade 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.

Iceland Chamber of Commerce | 32

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

2015 2014 2016 180 2018 2019 100 140 120 2012 2017 160 2011 2010 200 2013 +10% +0% +9% Real estate Bonds Equity YoY real return June 2019

Iceland Chamber of Commerce | 33

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 2018 2017 43 23 5 14 2019 62 4 13 8 20 21 18 15 7

• 6

11 Total outflows Government bonds inflows Listed shares inflows Other inflows Net

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

Iceland Chamber of Commerce | 34

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

Iceland Chamber of Commerce | 35

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% Norway Italy Austria Finland Sweden Greece France Portugal Bulgaria Germany United Kingdom Latvia Switzerland Croatia Estonia Denmark Lithuania Czechia Ireland Slovenia Slovakia Spain Belgium Cyprus Netherlands Hungary Malta Romania Liechtenstein Poland Luxembourg Iceland

Iceland Chamber of Commerce | 36

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 2,000 1,500 500 2,500 3,500 4,000 4,500 2,796 1998 2000 2002 2004 2006 2008 2010 2012 2018 2014 2016 1,032 2,321 4,239 2,336 Domestic debt Domestic equity Other domestic Foreign equity Foreign debt and other

Iceland Chamber of Commerce | 37

DOMESTIC SECTOR

4

Iceland Chamber of Commerce | 38

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%

Financial Services 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

Iceland Chamber of Commerce | 39

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

Iceland Chamber of Commerce | 40

Figure 4.3

Productivity gains are different across sectors but are largest in sectors affected by tourism and technology

Source: Statistics Iceland

Productivity Changes by Sectors1 (Cumulative percentage change from 2008 to 2018)

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

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

Iceland Chamber of Commerce | 41

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 Source: Statistics Iceland

0% 2% 4% 6% 8% 10% 12% 2012 2011 2006 2007 2010 2009 2008 2013 2014 2015 2016 2017 2018 Wage growth1 Unemployment

Iceland Chamber of Commerce | 42

Net Changes in Labour Force (Percent change by background)

Figure 4.5

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

Sources: Statistics Iceland; Iceland Chamber of Commerce

2,3 2013 2010 2009 2007 4,7 2006 2008 2014 2011 2012 2015 2016 3,0 2017 2018 3,0 4,7 0,2

• 8,4
• 1,7

0,9 1,7 2,5 4,7 4,6 Icelandic Immigrants

Iceland Chamber of Commerce | 43

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 136 2019 192 2020 192 2021 200 2022 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 index

increases proportionately more than the minimum wage, the minimum wage automatically increases to offset the difference.

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

Iceland Chamber of Commerce | 44

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 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

225 243 149 100 200 300 2008 2003 1997 1998 2002 1999 2000 2001 2004 2005 2006 135 2018 2007 2009 2010 2017 2011 2012 2016 2013 2014 2015 20193 Real prices Price-to-income1 Residential housing investment2

Iceland Chamber of Commerce | 45

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 units Housing adjusted for Airbnb 20 years old and older inhabitants

Iceland Chamber of Commerce | 46

RESOURCE SECTOR

5

Iceland Chamber of Commerce | 47

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 2017 2007 20191 2010 2018 2011 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)

Iceland Chamber of Commerce | 48

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 2009 2003

• Jun. 2019

2005 2006 2004 2011 2007 2008 2014 2010 2012 2013 2015 2016 2017 2018 EU Denmark Switzerland Finland Sweden Iceland Norway

Iceland Chamber of Commerce | 49

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

Iceland Chamber of Commerce | 50

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 distribution between renewables and non-renewables might be slightly inaccurate

20 15 45 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 NOR 63% 14% AUS 0% SAU 98% 44% Renewable resources Non-renewable resources

Iceland Chamber of Commerce | 51

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

Figure 5.5

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

Source: Iceland Chamber of Commerce

Data Stored in Europe Cooler Climate Lower Electricity Prices Increased Sales due to Green Energy Data Stored in Iceland

Iceland Chamber of Commerce | 52

Seafood Industry (Investment and Productivity)

Figure 5.6

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

Sources: Statistics Iceland; Iceland Chamber of Commerce

20 40 60 80 100 120 140 160 180 200 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

Iceland Chamber of Commerce | 53

Aquaculture Production (Thousand tons)

Figure 5.7

Aquaculture is expanding fast, salmon production in particular

Sources: Statistics Iceland; Iceland Chamber of Commerce 1 Projection of total production based on growth in January-May 2019

25 15 30 5 10 20 2009 2012 2010 20191 2014 2008 2011 5 2013 2015 2016 21 2017 2018 5 5 5 7 7 8 8 15 19 26 Salmon Trout and arctic char Other

Iceland Chamber of Commerce | 54

INTERNATIONAL SECTOR

6

Iceland Chamber of Commerce | 55

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.

500 250 750 1,000 1,250 1,500 1,750 2,000 2,250 2017 2022 2027 2032 2037 New Exports Other Goods Other Services Tourism Energy-Intensive Industry Fisheries

Iceland Chamber of Commerce | 56

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

214 224 613 122 117 307 100 200 300 400 500 600 700 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 376 204 Icelandic Research Fund Technology Development Fund

Iceland Chamber of Commerce | 57

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 96 104 115 126 136 178 234 241 257 2015 17 17 2016 2013 2014 18 17 17 2017 243 292 355 373 400 Corporations Other public institutions Universities

Iceland Chamber of Commerce | 58

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

Country Rebate Percentage Absolute Cap1 Million USD Tax Rebate 10m 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.

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Figure 2.20

2015 was the breakout year for the VC industry in Iceland

Source: Iceland Chamber of Commerce

1997

New Business Venture Fund Quasi-Public fund 56m USD Frumtak I Private Fund 52m USD

2008 2015

Frumtak II Private Fund 38m USD Brunnur Private Fund 30m USD Eyrir Sprotar Private Fund 34m USD

2017

Crowberry Capital Private Fund 37m USD

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

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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 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 Lithuania Sweden Britain Austria Greece Romania Finland Portugal France Estonia Slovenia Italy Croatia Cyprus Czech Republic Ireland Switzerland Spain Iceland Bulgaria Hungary Poland Slovakia Norway Denmark Latvia Malta Belgium Netherlands Luxembuorg European Countries Nordic countries Iceland

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FUTURE PROSPECTS

7

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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“

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The Four Focus Lenses of Disruptive Trends

Figure 7.2

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

Source: Iceland Chamber of Commerce

• 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

• penness to trade
• Focus on business

development in new markets

Examples Lenses

• 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

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Infrastructure Stock and Investment (Broadly defined1)

Figure 7.3

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

Sources: Statistics Iceland; Iceland Chamber of Commerce 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

10 20 30 0% 5% 10% 15% 20% 25% 30% 35% 40% 2002 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

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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

Sources: Statistics Iceland; Iceland Chamber of Commerce 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 2006 1.3 1.5 1.4 2004 1.6 2002 1.7 1998

• 13%

Capital stock in roads per car 1990-2017 average

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England-France 70km 2,000 MW SwePol 245km 600 MW Konti-Skan 1&2 149 km 550 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-Skan 200 km 800 MW BritNed 260km 1,000 MW NorNed 580km 700 MW Baltic Cable 262 km 600 MW Iceland-UK ~1,000 km 800-1,200 MW

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