OECD Economic Survey of Iceland 2023 - Presentation

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 GDP level Volume

Index 2019=100 115

Index 2019=100 115

Iceland Nordics OECD OECD - Europe

110 105

110 105

100

100

95

95

90

90

2019

2020

Source: OECD Economic Outlook No. 113 database.

2021

2022

2023

2024

2

The labour market remains tight A. Unemployment rate % of labour force, seasonally adjusted 10 9 8 7 6 5 4 3 2 1 0

Source: Statistics Iceland.

B. Labour force participation rate % of working-age population 88 87 86 85 84 83 82 81

3

The central bank has responded to rising inflation Inflation

% 12

%

Inflation

10

12

Policy rate

10

8

8

6

6

4

4

2

2

0 Jan-20

0

Jul-20

Jan-21

Jul-21

Jan-22

Jul-22

Jan-23

Note: Inflation refers to national headline CPI. Source: Central bank of Iceland and OECD, Consumer Prices database.

4

Fiscal consolidation has started but more is needed % of GDP 15

% of potential GDP 15

←Fiscal balance Underlying budget balance→

10

10

5

5

0

0

-5

-5

-10

-10

-15

-15

2000

2004

2008

2012

2016

2020 2022

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.

5

Growth is expected to gradually slow (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

Source: OECD Economic Outlook No. 113 database.

6

Raising productivity in a sustainable way

7

Wages have long been outpacing productivity Productivity and wages

Index, 2012Q1 = 100 160

Index, 2012Q1 = 100 160

140

140

120

120

100

100

Index, 2012Q1 = 100

Real compensation per hour, total economy Real productivity per hour worked, total economy

80 60

2012

2014

Source: OECD Economic Outlook No. 113 database.

2016

2018

2020

80 2022

60

8

The tax-benefit system should encourage second earners to work more Marginal effective tax rate for second earners by hours worked % 100

Iceland

Nordics excluding Iceland

% 100

OECD

80

80

60

60

40

40

20

20

0

0

20

25

30

35

40

45 50 55 60 65 70 75 Hours worked ( % of full-time work)

80

85

90

95 100

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.

9

Investment in the right skills is needed Skills mismatch % of workers aged 15-64 50

2019 or latest

Overqualification

Underqualification

% of workers aged 15-64 50 40

30

30

20

20

10

10

0

0

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

40

Source: OECD, Skills for Jobs database.

10

Market access should be made easier for new firms Barriers to domestic and foreign entry Index 0 (less stringent) to 6 (stringent), 2018

3.0

2.5

2.5

2.0

2.0

1.5

1.5

1.0

1.0

0.5

0.5

0.0

0.0

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

3.0

Note: A higher indicator value means more stringent regulation.

Source: OECD, Product Market Regulation database.

11

Tourism could soon reach the limits of sustainability Tourists

Overnight visitors per inhabitant 7

2019 or latest

Overnight visitors per inhabitant 7 6

5

5

4

4

3

3

2

2

1

1

0

0

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

6

Data for 2019 except Finland (2018) and Sweden (2014).

Source: Statistics Iceland; OECD, Tourism database.

12

Efforts to reduce carbon emissions should be stepped up Total greenhouse gas emissions per capita Kg per capita

Kg per capita 18

18

15

15

12

12

9

9

6

6

Iceland

3 0

2000

2002

2004

Source: OECD, Environment Statistics database.

2006

2008

OECD

2010

2012

3 2014

2016

2018

2020

0

13

Making the most of immigration

14

Immigration is rising faster than in other Nordic countries

% 20

B. Immigration flows As a share of population

A. Foreign citizens As a share of population

Iceland

% 5

Other Nordics

16

4

12

3

8

2

4

1

0

0

1987 1992 1997 2002 2007 2012 2017 2022 2023*

1990

1995

2000

2005

2010

2015

2020

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.

15

Immigration brings large economic benefits GDP premium relative to 2019

% 12

Baseline versus no migration scenario

% 12

Gains by 2030

Gains by 2040

10

10

8

8

6

6

4

4

2

2

0

0

DNK

FIN

NOR

SWE

ISL

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.

16

Immigrants are young and have high participation rates Years 70 60

A. Median age of the foreign-born and native-born population, 2022

B. Activity rate by background, 15-64 years, 2021

Native-born

Native-born

Foreign-born

Foreign-born

90

50

80

40 30

70

20

60

BEL ITA FRA NLD LVA DEU DNK AUT FIN OECD-EU ESP NOR LUX IRL EST SWE CZE POL ISL

ISL POL FIN IRL DNK NOR CZE SWE ESP BEL AUT ITA NLD LUX OECD-EU DEU FRA EST LVA

10 0

% 100

50

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.

Source: Statistics Iceland; Eurostat.

17

Establishing a one-stop shop would ease skills recognition and would make language training courses more effective Overqualification rates

Percentage of the highly educated population aged 15-64 not in education, 2021 % 70

Native-born

% 70

Foreign born

60

60

50

50

40

40

30

30

20

20

10

10

0

Total

Recent Settled (less than 10 years) (at least 10 years)

EU-born

Non-EU born (foreign-educated)

0

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.

18

Implementation of measures for students with a diverse linguistic background is welcome and needs to continue 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 0

Score difference 0 -20

-20

-40

-40

-60

-60 -80

-80 FIN

ISL

SWE

DNK

NOR

OECD

-100

Note: Socio-economic background refers to students’ and schools’ socio-economic profile.

Source: OECD, PISA 2018 database.

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

% of teachers 45

45

40

40

35

35

30

30

25

25

20

20

15

15

10

10

5

5

0

0

FIN

OECD

DNK

Source: OECD, Teaching and Learning International Survey (TALIS) database.

NOR

ISL

SWE

20

Better integrating migrants also requires meeting their housing needs Overcrowding rate by country of birth Aged 18 or older, 2018 % of population 60 50

Native-born

Foreign-born

% of population 60 50 40

30

30

20

20

10

10

0

0

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

40

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.

21

For more information OECD Economics OECD

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