The Iceland Observer

Economic Indicators

Inflation Rebound: Iceland’s annual inflation rate ticked up to 4.2% in April 2025 (from 3.8% in March), marking the first acceleration in nine months. Higher utility costs (+7.2%) led the increase, while food prices rose ~5.7%. Excluding housing, inflation was 3.2%, as price pressures remain broad-based.

Labor Market: Unemployment averaged ~5.0% in Q1 2025, up from 4.1% a year earlier. About 11,500 people were jobless in Q1, as economic growth cooled and workforce participation dipped slightly. Nevertheless, over 76% of Icelanders 16–74 are employed, with average work hours inching higher.

Outlook: The IMF’s Article IV review projects GDP growth to rebound to 1.8% in 2025 after just 0.5% in 2024, as exports recover and real wages rise. Inflation is expected to gradually ease toward the 2.5% target by late 2026. The Fund urged rebuilding fiscal buffers and boosting productivity to sustain medium-term growth.

Corporate & Market News

Iceland Innovation Week 2025: Reykjavík hosted Iceland Innovation Week (May 12–16), a premier Nordic startup festival blending business, sustainability, and Icelandic culture. The event drew entrepreneurs, investors and climate tech leaders to workshops, keynotes, and even a quirky “Fermented Shark Tank” pitch competition where founders pitched after sampling hákarl (fermented shark). The festival showcased Iceland’s dynamic ecosystem – underscoring how this 370,000-person nation punches above its weight in innovation – and featured themes from climate solutions to creative tech and inclusion.

Arion Bank posted robust Q1 results, with ISK 6.4 billion net profit (up from ISK 4.4 billion in Q1 2024). Return on equity hit 12.8% as higher net fee income and stable interest margins lifted revenue. Operating costs were contained (+0.7%), yielding a cost-to-income ratio below 35%. Arion also returned ISK 19.1 billion to shareholders in Q1 via dividends and buybacks, signaling confidence in its capital position.

Icelandair Group reported improved Q1 performance, narrowing its net loss by $15 million year-on-year. EBIT remained negative at $62.3 million, but improved by $6.6 million from last year. Revenues climbed 11% to $286 million on record passenger revenue and a 9% rise in travelers (828,000 in Q1). The airline added four new Airbus A321LR jets ahead of the summer season to modernize its fleet. While upbeat about stronger Q2 and Q3 profitability, Icelandair held off issuing full-year guidance amid uncertainty in late-year demand.

JBT Marel Corporation – the newly merged entity of U.S. firm JBT and Iceland’s Marel – delivered a 12% jump in Q1 revenue to $854 million, with strong demand in poultry, meat and pet food processing equipment. Orders surged to $916 million, pushing backlog to a record $1.3 billion, underscoring solid future sales. However, hefty one-time costs (pension settlements and M&A integration expenses) drove a net loss in the quarter. On an adjusted basis, EBITDA of $112 million (13.1% margin) beat expectations. The company noted core operations are healthy, but it suspended its 2025 outlook due to macroeconomic uncertainties around supply chains and trade policy.

Eimskip, the Icelandic logistics leader, saw Q1 revenues rise 3.4% (to $200 million) amid a 6.6% increase in shipping volume. EBITDA grew 7.7% to $15.3 million for the quarter, as higher wage costs were offset by efficiency gains. Net profit was slightly negative ($0.8 million loss, versus a $0.5 million profit in Q1 ’24) due to increased depreciation and lower affiliate income. Management noted U.S. tariff tensions – after a new 10% U.S. import tariff on Icelandic goods – have created concern, but so far minimal impact on Eimskip’s Trans-Atlantic business. The company cites strong cash flow and stable freight rates, and is continuing to optimize routes to manage costs.

Investment & M&A Activity

Íslandsbanki: The Icelandic government sold its remaining 45.2% stake, raising ISK 90.6 billion (~$703 million). Initially launching a 20% offering, the Treasury upsized to the full stake due to overwhelming demand, with total bids reaching twice the shares on offer. The fixed price of ISK 106.5 per share was about a 5% discount to recent trading, favoring local retail investors. The sale – massively oversubscribed by both Icelandic and foreign investors – marks the government’s exit from bank ownership stemming from the 2008 crisis. Proceeds are slated for public debt reduction and investment, and about 8% of Icelanders became shareholders in the bank through this offering.

Legal & General invested $50 million in the offering as part of its partnership with the Treasury. With the transaction completed on May 16, Iceland’s equity market saw an immediate boost in liquidity and float. The bank’s stock has traded stably post-sale, and governance moves to fully private hands.

Venture & Startup Scene: No major startup venture deals were announced during the week, but Iceland Innovation Week provided a platform for investors and founders to connect. The event’s Fermented Shark Tank pitch contest spotlighted emerging startups, and several Icelandic tech firms (spanning gaming, AI, and sustainability) drew attention from Nordic and U.S. venture funds in attendance. Organizers reported that multiple funding conversations were initiated at the festival, foreshadowing potential deals in the coming months. The overall sentiment in the startup ecosystem remains optimistic, bolstered by new government incentives for innovation and international visibility from the week’s events.

Renewable Energy & Industry

Landsvirkjun: Iceland’s national power company raised $150 million in green bonds in the U.S. private placement market. Strong investor demand led the deal to be upsized from the initial $125 million target. The bonds (in 6- and 8-year tranches at ~5.2–5.4% fixed rates) are issued under Landsvirkjun’s Green Financing Framework. Proceeds will fund new renewable projects, including Vaoalda Wind Farm – Iceland’s first large-scale wind farm (28 turbines, 120 MW) – and the new Hvammur Hydropower Station. These projects, coming online by 2026–27, will expand Iceland’s 100% renewable power capacity. The successful bond sale (with major institutional buyers involved) highlights investor appetite for Iceland’s clean energy sector.

E-Fuels Debate: Tensions emerged in Iceland’s push for green hydrogen and e-fuels. Several European hydrogen startups have sought to build e-fuel plants in Iceland (leveraging its cheap renewable electricity), but Landsvirkjun has declined to supply power to them, citing capacity constraints. The hydrogen firms have lodged a complaint with the EFTA Surveillance Authority, arguing the state utility may be unfairly blocking competition. European regulators are now investigating whether Iceland’s biggest energy producer can refuse new industrial buyers. This controversy comes as Iceland weighs how to allocate its renewable resources – currently stretched by aluminum smelters and other heavy industry – toward emerging climate-tech ventures. A faster build-out of wind and geothermal capacity may be needed if Iceland is to host energy-intensive e-fuel projects in the future.

Policy & Central Bank

Central Bank of Iceland: Held its key interest rate at 7.75% (following four consecutive cuts since late 2024) and stressed caution amid the April inflation uptick. A fresh CBI market survey (conducted May 5–7) shows market participants expect one more 0.25% rate cut by end-Q2 (to 7.5%), and further easing to about 6.0% by next year. Inflation expectations among investors have actually improved – median forecasts are 3.3% one year ahead and 3.0% in two years, closer to the 2.5% target. Two-thirds of respondents still view the current monetary stance as “too tight,” though this is down from 80% in January, reflecting growing confidence that inflation will moderate. The CBI has signaled it will maintain a restrictive stance until disinflation is firmly on track, but Governor Ásgeir Jónsson noted optimism that “the program is working” to tame price growth.

Government Divestments & Fiscal Plans: Althingi (Parliament) gave final approval for the Íslandsbanki stake sale, aligning with the 2025 budget’s aim to reduce public debt by using privatization proceeds. Finance Minister Dadi Már Kristófersson lauded the successful offering as a win for fiscal strength and market development. Meanwhile, the government is preparing its medium-term fiscal update: with growth projected to pick up and tourism revenues strong, no major austerity is expected. Officials aim to taper deficits gradually and build buffers, per IMF advice, while increasing strategic investments (e.g., in innovation and infrastructure). On the climate front, authorities opened applications for new grants (up to ISK 15 million each) to help farmers and businesses invest in energy-saving technology, funded by the Climate and Energy Fund. These policies reflect a balancing act – supporting growth and green investment – as Iceland emerges from its post-pandemic economic adjustment.

President Halla Tómasdóttir: Embarked on a state visit to Sweden (May 6–8) to strengthen bilateral ties. Hosted by King Carl XVI Gustaf, President Tómasdóttir – Iceland’s first female president from a business background – focused on cooperation in healthcare, security, and the creative industries. She was joined by Foreign Minister Þjorgérður K. Gunnarsdóttir and a delegation of 30 Icelandic companies, highlighting opportunities in biotechnology, green innovation, and film/TV production. Concurrent industry forums in Stockholm connected Icelandic and Swedish businesses, resulting in new MOUs in digital health and joint media projects. The visit underscored Iceland’s commitment to regional partnerships and cultural exchange, and followed an earlier successful state visit to Norway, as the President elevates Iceland’s diplomatic and economic profile abroad.

Trade & Arctic Affairs: Iceland continued to navigate geopolitical currents carefully. In trade, leaders voiced relief that the country was spared the harshest of new U.S. tariffs (facing a 10% import tariff vs. 20–37% on some European peers). Still, officials are monitoring potential EU–US trade frictions and any spillover to Iceland’s export-reliant sectors (marine products and aluminum). On Arctic affairs, Iceland participated in a Nordic council meeting addressing climate impacts and security in the High North. Reykjavík reiterated its support for peaceful cooperation in the Arctic, especially as great-power interest rises in the region. Iceland also backed Ukraine’s EU candidacy during discussions with European partners, aligning with its Western allies on key foreign policy issues. Overall, the week saw Iceland engaging diplomatically on multiple fronts – reinforcing ties with neighbors, while guarding its interests amid global uncertainty.

Greenland Diplomacy & Economic Outreach: In Brussels this week, Greenland's Foreign Minister Vivian Motzfeldt stated that the country aims to secure greater benefits from its long-standing defense pact with the United States while pursuing deeper cooperation with the European Union. She emphasized plans to broaden collaboration beyond military ties to include climate, education, and business. Greenland is also targeting critical minerals as a strategic sector for EU partnership, with the goal of diversifying its economy. The diplomatic push comes amid renewed international interest in Greenland’s resources and Arctic location—highlighted by former President Donald Trump’s revived talk of U.S. acquisition, a notion strongly rejected by both Greenlandic and Danish officials. EU leadership reaffirmed Greenland’s right to self-determination without outside pressure.