Economy of Iceland
The economy of Iceland is a highly developed mixed market economy. In 2011, the gross domestic product was US$12 billion. By 2018, it had increased to a nominal GDP of US$27 billion, and by 2025, it reached US$35 billion. As of 2025, it has the fifth highest nominal GDP per capita and fourteenth highest GDP per capita by PPP. In 2025 Iceland topped the Human Development Index.
Iceland has a mixed economy with high levels of free trade and government intervention. However, government consumption is lower compared to other Nordic countries. 100% of Iceland's electrical grid is produced from renewable sources. Geothermal and Hydropower are the primary sources of energy in Iceland.
A founding member of the OECD, Iceland has the third lowest Not in Education, Employment, or Training rate among the youth.
The 2008–2011 Icelandic financial crisis produced a decline in GDP and employment, which has since been reversed entirely by a recovery aided by a tourism boom starting in 2010. Tourism accounted for more than 10% of Iceland's GDP in 2017. After a period of robust growth, Iceland's economy slowed down according to an economic outlook for the years 2018–2020 published by Arion Research in April of 2018.
In the 1990s Iceland undertook extensive free market reforms, which initially produced strong economic growth. As a result, Iceland was rated as having one of the world's highest levels of economic freedom as well as civil freedoms. In 2007, Iceland topped the list of nations ranked by Human Development Index and was one of the most egalitarian, according to the calculation provided by the Gini coefficient.
From 2006 onwards, the economy faced problems of growing inflation and current account deficits. Partly in response, and partly as a result of earlier reforms, the financial system expanded rapidly before collapsing entirely in the 2008–2011 Icelandic financial crisis. Iceland had to obtain emergency funding from the International Monetary Fund and a range of European countries in November 2008. The economy has since rebounded since 2010, and continues to grow to this day.
History
In medieval Iceland, trade was traditionally conducted through barter. The traditional nationalistic historical narrative says that Iceland had experienced a golden age from 874 until the 11th century, when the country came under foreign rule and "suffered humiliation" as its economy declined. There is very little evidence to support this narrative.Iceland had among the lowest GDP per capita out of all the Western European countries at the start of the 20th century. An assessment by economists at the Central Bank of Iceland stated that the country's "post-World War II economic growth has been both significantly higher and more volatile than in other OECD countries", and that "the Icelandic business cycle has been largely independent of the business cycle in other industrialised countries." Iceland has had a total of twenty financial crashes since 1875, according to Reuters.
Fishing became a large part of the Icelandic economy after the 1880s, partly due to expanded fishing with sailing smacks. During the Second World War, the UK imposed trade sanctions on Iceland to prevent them from trading with Germany. After the British and later American occupations of the island, the economy was boosted by a substantial amount, and Iceland went from one of the poorest countries in Europe to one of the wealthiest. This was furthered by Iceland being included as part of the post-WWII Marshall Plan, receiving the largest amount per capita between 1948 and 1951, almost double the amount of the next highest recipient.
Towards the end of the 20th century, Iceland's economy continued to grow. A coalition between the Independence and Progressive parties led to the privatization of state-owned banks and telecommunications. Corporate income tax was reduced to 18%, inheritance tax was greatly reduced, and the net wealth tax was completely abolished. The term "Nordic Tiger" became heavily used refer to the period of economic prosperity in Iceland that began in the 1990s.
The "Nordic Tiger" period came to a sudden end as a result of the 2008 financial crisis. Iceland went from being the 10th richest country in the world in 2007 to the 21st in 2010. Banks made risky loans and manipulated markets, with the country's regulators understaffed and not properly supervising them. The Icelandic króna underwent sharp inflation, with the three largest banks in the country being placed under government control. Iceland's central bank raised its interest rate to 18% in an attempt to combat the inflation.
With help from the International Monetary Fund, Iceland's economy stabilised and managed to pay off all of its loans by the end of 2015. Economists Ásgeir Jónsson and Hersir Sigurjónsson said that "Iceland was treated differently from developing countries and former IMF clients. There was no call for Iceland to adopt sharp austerity measures at the inception of the joint economic plan. Instead, the government would be allowed to maintain large public deficits in the first year – 2009 – allowing fiscal multipliers to counteract the output contraction that was underway. Iceland also was not asked to downsize its Scandinavian-type welfare system."
Geography and resources
Iceland occupies a land area of 103,000 square kilometers. It has a 4,790 kilometer coastline and a 200 nautical mile exclusive economic zone extending over 758,000 square kilometers of water. Approximately only 0.7% of Iceland's surface area is arable, since the island's terrain is mostly mountainous and volcanic.Iceland has few proven mineral resources. In the past, deposits of sulphur have been mined, and diatomite was extracted from Lake Mývatn until recently. However, today most sulphur is obtained in the desulfurization of petroleum and fossil gas. The diatomite plant has closed for environmental reasons. The only natural resource conversion in Iceland is the manufacture of cement. Concrete is widely used as building material, including for all types of residential housing.
By harnessing the abundant hydroelectric and geothermal power sources, Iceland's renewable energy industry provides close to 85% of all the nation's primary energy – proportionally more than any other country – with 99.9% of Iceland's electricity being generated from renewables.
By far the largest of the many Icelandic hydroelectric power stations is Kárahnjúkar Hydropower Plant in the area north of Vatnajökull. Other stations include Búrfell, Hrauneyjarfoss, Sigalda, Blanda, and more. Iceland has explored the feasibility of exporting hydroelectric energy via submarine cable to mainland Europe and also actively seeks to expand its power-intensive industries, including aluminium and ferro-silicon smelting plants.
Sectors
In 2017 the proportion of Iceland's exports was: tourism 42%, seafood 17%, aluminium 16%, other 24%.Tourism
Tourism is one of Iceland's largest export sector. Tourism accounted for more than 12% of the country's GDP in 2017. Iceland is one of the most tourism-dependent countries on Earth. In October 2017 the tourism sector directly employed around 26,800 people, with the total number of employees in the country being 186,900.At the start of the growth period around 2010, tourism benefited from a weak ISK, but a strong ISK then cooled down the sector. From 2010 to 2018, tourist arrivals in Iceland increased by 378%.
Manufacturing
Iceland is the world's largest electricity producer per capita. The presence of abundant electrical power due to Iceland's geothermal and hydroelectric energy sources has led to the growth of the manufacturing sector. Power-intensive industries, which are the largest components of the manufacturing sector, produce mainly for export. Manufactured products constituted 36% of all merchandise exports, an increase from the 1997 figure of 22%. Power-intensive products' share of merchandise exports is 21%, compared to 12% in 1997.Aluminium
is the most important power-intensive industry in Iceland. There are currently three plants in operation with a total capacity of over 850,000 metric tons per year in 2019, putting Iceland at 11th place among aluminium-producing nations worldwide as of 2023.Rio Tinto Alcan operates Iceland's first aluminium smelter, in Straumsvík, near the town of Hafnarfjörður. The plant has been in operation since 1969. Its initial capacity was 33,000 metric tons per year, but it has since been expanded several times and now has a capacity of about 189,000 t/yr.
The second plant started production in 1998 and is operated by Norðurál, a wholly owned subsidiary of U.S.-based Century Aluminum Company. It is located in Grundartangi in Western Iceland near the town of Akranes. Its former capacity was 220,000 t/yr but an expansion to 260,000 t/yr has already finished. In 2012, the plant produced 280,000 metric tons which was valued at 610 million dollars or 76 billion krónur. 4,300 gigawatts hours were used in the production that year, amounting to nearly one-fourth of all electrical energy produced in the country. In October 2013, Norðurál announced the start of a five-year project aimed at increasing its production by a further 50,000 t/yr.
United States–based aluminium manufacturer Alcoa runs a plant near the town of Reyðarfjörður. The plant, known as Fjardaál, has a capacity of 346,000 t/yr and was put into operation in April 2008. To power the plant, Landsvirkjun built Kárahnjúkar, a 690-MW hydropower station. The project was enormous in the context of the Icelandic economy, increasing total installed electric power capacity from under 1,600 MW to around 2,300 MW.
According to Alcoa, construction of Fjardaál entailed no human displacement, no impact on endangered species, and no danger to commercial fisheries; there will also be no significant effect on reindeer, bird and seal populations. However, the project drew considerable opposition from environmentalist groups such as the World Wide Fund for Nature, which called on Alcoa to abandon the plan to build Fjardaál. In addition, Icelandic singer Björk was a notable early opponent to the plan; protesting the proposed construction, the singer's mother, Hildur Rúna Hauksdóttir, went on a hunger strike in 2002.
Several other aluminium smelter projects have been planned. Between 2005 and 2011, Alcoa conducted a feasibility study for a second plant in Iceland near Húsavík. That plant was to have a 250,000 t/yr capacity, to be powered entirely by geothermal power, although later estimates showed a potential need for other sources of power. In October 2011, Alcoa announced its decision to cancel the Bakki project. In 2006, Nordurál signed a memorandum of understanding with two Icelandic geothermal power producers, Hitaveita Suðurnesja and Orkuveita Reykjavíkur, to purchase electricity for its own aluminium reduction project in Helguvík. The power supplied will initially support aluminium production of 150,000 t/yr, which will eventually grow to support 250,000 t/yr.