Uncertainty about new variants of the virus and the duration of the pandemic remains pronounced, of course. Widespread vaccination among populations likely to travel to Iceland and less severe illness caused by the Omicron variant warrant cautious optimism, however.

Actually, the outlook for tourist numbers in 2022 has improved since our forecast was prepared, although not much time has passed since then. We completed our forecast preparation on Friday 14 January, the same day the Icelandic authorities announced a tightening of public health measures. Suffice it to say, then, that the outlook was not much to write home about at that point. Since then, however, there has been a turnaround in public health measures, and restrictions have been eased significantly, both in Iceland and many other countries. This includes several of Iceland’s nearest neighbours, such as the UK, Denmark, Norway, the Netherlands, France, and Ireland. Furthermore, recent news releases indicate that Italy, Switzerland, and Finland are moving in the same direction. Passengers from these countries accounted for about 30% of tourist visits to Iceland in 2017-2019; therefore, increased desire to travel and reduced fear of contagion among these groups could have a markedly positive impact on visitor numbers in the quarters to come.

As the chart shows, we project that relatively few tourists will come to Iceland in the next few months, as press releases indicate that the number of foreign visitors fell in January. As spring settles in, however, the outlook is for a steady increase, with visitor numbers in the last four months of 2022 equalling 70% of the total for the same period in 2019. As is mentioned above, recent developments suggest that the uncertainty in this forecast is concentrated strongly on the upside. In other words, tourist numbers could easily be markedly higher, whereas we think it relatively unlikely that they will turn out much lower.

Tourism, plus exports of intellectual property and other services, is the main driver of the 19% export growth we forecast for this year. Added to this is modest growth in goods exports, with booming capelin, farmed fish, and silicon metals exports offset by a contraction in exports of aluminium and groundfish, particularly cod. Increased tourist arrivals will deliver the lion’s share of the forecasted 11% export growth in 2023 and just under 5% growth in 2024. Furthermore, the outlook is for stronger exports of farmed fish, aluminium and other industrial goods, and increasingly, intellectual property usage as well.

A faster recovery in tourism would raise growth outlook

Because of the increased probability that tourist numbers will exceed our January forecast, it is interesting to speculate about the impact this could have on key forecast variables. In the service of this exercise, we set up a rough scenario assuming 1.5 million tourist arrivals this year instead of the previously projected 1.1-1.2 million. Our findings suggest that exports would grow by nearly 24% in 2022 (as opposed to 19% in the forecast). If we assume additional effects on consumption, investment, and imports, GDP would measure 5.3% for the year (as compared with 4.7%). Unemployment would fall faster, to an average of 4.0% (4.5%), and the current account surplus would be larger, at 2.8% of GDP (1.8%). Thus the outlook is for a stronger ISK, which would help keep inflation in check further ahead.

These back-of-the-envelope calculations show clearly that the upswing in tourism will have a strong impact on the economy in the coming term, in addition to being a welcome development for Iceland’s largest export sector.