This Survey is published on the responsibility of the Economic and Development Review Committee of the OECD, which is charged with the examination of the economic situation of member countries.

The economy has expanded fast until recently, driven by a rapid recovery of foreign tourism and strong domestic demand. Growth is expected to slow gradually in the course of 2023 amidst tighter financial conditions.

Iceland’s economy is one of the fastest-growing of the OECD, driven by foreign tourism and strong domestic demand. The labour market is tight and wage growth robust, while high wage compression helps maintain a highly egalitarian economy. Inflation is persistent and broadening, and inflation expectations have de-anchored. The fiscal stance is tightening but more could be done to dampen inflationary pressures and support monetary policy. Labour market imbalances are rising. While progress has been made to remove barriers to the entry of firms in the tourism and construction sectors, barriers remain high in other sectors. Structural reform could help raise productivity notably in the domestic sector, while also contributing to disinflation. Higher and broader taxation of greenhouse gas emissions, coupled with investment in cost-effective actions, would help to efficiently achieve further emission cuts.

Immigration has increased rapidly since the late 1990s, driven largely by strong economic growth and high standards of living. By mid-2023, foreign citizens made up around 18% of the population. This has brought important economic benefits to Iceland, including by boosting the working age population and helping the country to meet labour demands in fast-growing sectors. However, there are important challenges regarding the integration of immigrants and their children that need to be addressed through a comprehensive approach, helping to make the most of immigration. Successful labour market integration of immigrants requires more effective language training for adults and an improvement in skills recognition procedures. At the same time, immigrants need more opportunities to work in the public sector and the adult learning system should be adjusted to better encompass their training needs. Strengthening language skills is key to improving the weak educational outcomes of immigrant students. Enhancing teachers’ preparedness to accommodate students’ diverse educational needs is another pre-requisite. Strengthening integration further hinges upon meeting the housing needs of the immigrant population, including through an increase in the supply of social and affordable housing.