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Iceland: increase competition and economic diversification to support the recovery from COVID-19, says OECD

 

07/07/2021 - Rising exports are helping to restore economic growth in Iceland after the blow from the COVID-19 crisis, even though tourism is still recovering. Further diversifying the economy and pursuing structural reforms to boost productivity growth will be key to building a strong and sustainable recovery, according to a new OECD report.

 

The latest OECD Economic Survey of Iceland says that once the recovery is well underway, support to households and firms can give way to fiscal consolidation. Lowering barriers for capital, improving skills and offering well-targeted support for business Research and Development (R&D) would help to drive innovation and growth. Investing in low-carbon infrastructure and incentivising research in green technologies would help Iceland to advance on its ambitions to green its economy.

 

“Iceland’s economy was hit hard by the COVID-19 crisis but is now well on the road to recovery thanks to effective policy action,” said OECD Director of Economic Country Studies Alvaro Pereira, presenting the report alongside Minister of Finance and Economic Affairs Bjarni Benediktsson. “Going forward, reforms to unlock Iceland’s potential for further innovation and productivity growth, while advancing the low-carbon transition, will be key.”

 

Iceland

The Survey projects GDP growth of 2.8% in 2021 and 4.7% in 2022 after a contraction of 6.6% in 2020. A plan in place to increase spending on infrastructure, the digital transition, the green economy and R&D by around 0.5 percentage points of GDP will further support the rebound.

 

Pandemic-related travel restrictions reduced foreign arrivals to Iceland by three-quarters in 2020, after inbound flight volumes were already hit in 2019 by the insolvency of a national airline. The blow to hotels, restaurants and other tourism services was cushioned in part by a doubling in domestic trips by Icelanders, but a full recovery of the tourism sector hinges on health and economic conditions overseas enabling the return of foreign visitors.

The Survey projects GDP growth of 2.8% in 2021 and 4.7% in 2022 after a contraction of 6.6% in 2020. A plan in place to increase spending on infrastructure, the digital transition, the green economy and R&D by around 0.5 percentage points of GDP will further support the rebound.

 

Pandemic-related travel restrictions reduced foreign arrivals to Iceland by three-quarters in 2020, after inbound flight volumes were already hit in 2019 by the insolvency of a national airline. The blow to hotels, restaurants and other tourism services was cushioned in part by a doubling in domestic trips by Icelanders, but a full recovery of the tourism sector hinges on health and economic conditions overseas enabling the return of foreign visitors.

 

Non-tourism exports were already rising in recent years, with intellectual property services now accounting for around 15% of service exports. Data processing and storage are also growing rapidly, attracted by low energy prices and a cool and windy climate. Increasing the transmission capacity of the submarine data cables linking Iceland to Europe and North America, and building new ones, could strengthen competition and raise export revenues.

 

Across the economy, productivity and competitiveness have declined in recent years, due in part to stringent product market regulation, occupational licensing and other barriers to new entrants. Lowering regulatory barriers to competition – especially in the important tourism and construction sectors, but also in agriculture and energy – and easing restrictions on foreign-owned firms would help to diversify the economy and drive growth.

 

Iceland performs well overall on innovation, but it spends less on R&D than its Nordic peers. Patents and trademark applications are below the EU average, and the share of high-tech goods in total exports is relatively low. Helping young firms to access finance and adopt digital technologies, encouraging collaboration on innovation and offering better targeted support for business R&D would unlock private investment and drive innovation among small firms.  

 

Iceland relies far more on renewable geothermal and hydropower energy than any other OECD country. Even so, per capita greenhouse gas emissions are above the OECD average, partly because of emission-intensive aluminium smeltering. Meeting the government’s goal of reducing emissions by at least 40% from 2005 levels by 2030 will require effective carbon-reducing policies across all economic sectors.

 

See a Survey Overview with key findings and charts (this link can be used in media articles).

 

For further information, journalists are invited to contact Catherine Bremer in the OECD Media Office (+33 1 45 24 80 97). 

 

Working with over 100 countries, the OECD is a global policy forum that promotes policies to preserve individual liberty and improve the economic and social well-being of people around the world

 

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