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GDP growth hit 15-yr high in 2022

The Icelandic economy grew stronger and hotter in 2022, although the pace subsided over the course of the year, largely due to a slowdown in private consumption growth. A period of considerably slower GDP growth lies ahead as the economy eases towards greater equilibrium after the recent surge.

According to newly published figures from Statistics Iceland (SI), GDP growth measured 6.4% in 2022. This was somewhat below our macroeconomic forecast from early February but still the fastest growth rate Iceland has seen since the (in)famous year 2007. The big picture is also quite like the one we sketched out in our February forecast. The economy cantered along at a brisk pace, driven mainly by a private consumption boom and supported by the resurgence of tourism and handsome business investment activity.

Although GDP growth was robust throughout 2022, it slowed markedly in Q4, falling to 3.1% by the year-end after peaking at 8.2% in Q1. As the chart indicates, weaker growth in private consumption and exports were the main causes of dwindling output growth.

Tourism: the mainstay of export growth

Even though the balance on goods and services trade was strongly negative in 2022, the contribution of net trade to output growth was broadly neutral, as can be seen in the fact that domestic demand and GDP grew at virtually the same pace; i.e., 6.4%. Export growth measured nearly 21% during the year, propelled largely by booming services exports, which in turn stemmed mainly from the tourism industry’s post-pandemic growth spurt. On the whole, services exports grew by 54% in volume terms, while goods export volumes increased by just over 1% over the same period.

Services also accounted for the lion’s share of import growth in 2022, which measured nearly 20%. Overall, services import volumes were up nearly 40% year-on-year, as opposed to 12% for goods imports. The predominance of services imports mainly reflects two things: businesses bought all sorts of services during the year, and Icelanders stepped up their consumption spending while travelling abroad.

Rebound in business investment

As we had expected, business investment was the sole contributor to the year’s nearly 7% growth in total investment between 2021 and 2022. Business investment growth measured over 15% and was distributed fairly equally across key sectors, according to SI. It was the second year in a row to see an upturn in business investment, after a three-year hibernation.

On the other hand, residential investment contracted by over 6% YoY. SI points out, however, that residential investment was quite strong despite the contraction, and data from the Housing and Construction Authority show that the number of fully finished homes rose by nearly 3,200 in 2022. Public investment also contracted marginally, after growing somewhat in 2021.

Private consumption takes flight – literally and figuratively

As is noted above, the private consumption boom was the main catalyst for last year’s GDP growth. On the whole, private consumption surged by 8.7% in volume terms, its fastest growth rate since 2005. It was particularly strong in H1 but then eased steadily in H2.

SI’s press release highlights an interesting titbit: that even though real wage growth as measured by the wage index lost considerable momentum over the course of 2022, total wage income rose by over 15% during the year. As a result, the increase in price-adjusted purchasing power by that measure correlated relatively well with private consumption. Private consumption growth was particularly strong in items relating to transportation and motor vehicle purchases, as well as in spending related to overseas travel.

Considerably slower growth ahead

The new figures from SI confirm the picture we had sketched out in our February macroeconomic forecast, of an economy that has heated up swiftly after a very chilly spell. In our opinion, these figures and other indicators imply strongly that growth peaked in H1/2022 and will soon settle into a gentler tempo based to a greater degree on exports.

According to our macroeconomic forecast, GDP growth will measure 3.4% per year in 2023 and 2024, then taper off to just under 3% in 2025, and the economy will move steadily towards better equilibrium in terms of domestic activity and external balance alike.


Jón Bjarki Bentsson

Chief economist