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Icelandic Financial Market Digest 15. mars

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

Strong growth in private consumption and services exports early in 2016

Icelanders’ payment card turnover soared in February, according to new payment card turnover figures published yesterday by the Central Bank of Iceland (CBI), and there are a number of signs that private consumption growth in Q1/2016 will be the strongest seen since the latter half of 2007. In spite of a surge in overseas use of domestic payment cards, card turnover generated strong foreign exchange inflows during the month, owing to virtually unprecedented year-on-year growth in foreign card use in Iceland. Figures indicate that private consumption and services exports are off to a roaring start in 2016 and will be two of the main drivers of GDP growth this year.

Striking growth in card turnover

Individuals’ card turnover grew 16.6% YoY in real terms in February, the strongest growth rate since August 2007. Naturally, the extra day in February in a leap year has some impact, but even when adjusted for the extra day, growth measured a full 13%. In real terms, Icelanders’ card turnover in Iceland grew 14.0% YoY in February (in terms of the CPI excluding housing), while Icelanders’ card turnover abroad grew 38.3%. 

Other economic variables point in the same direction

The figures above indicate that consumption is growing by leaps and bounds at present. In the first two months of the year, individuals’ card turnover grew 12.5% YoY in real terms, and if March turns out similar, the growth rate will be the strongest since Q4/2007. Other indicators of private consumption point in the same direction. For example, according to figures from the Bílgreinasambandið (the Icelandic association of motor vehicle sales and service entities), new motor vehicle sales to buyers other than car rental agencies grew 49% YoY in the first two months of 2016, and figures from the Icelandic Tourist Board indicate that the number of Icelanders travelling overseas was up more than 16% YoY over the same period. And last but not least, the Gallup Consumer Confidence Index (CCI) indicates that households are much more upbeat about the current situation and near-term outlook for the economy and the labour market than they were early in 2015. The CCI, which tracks private consumption quite closely, averaged 121.4 points in the first two months of the year, up from 86.7 in Jan-Feb 2015, and is therefore well above the 100-point threshold indicating parity between optimists and pessimists. 

Foreigners’ card use continues to outpace growth in tourist visits

Foreign nationals’ card turnover in Iceland totalled ISK 13.2bn in February and, in ISK terms, was up by a full 65% YoY. This surge in card use far exceeds the rise in the number of foreign tourist departures via Keflavík Airport (KEF) over the same period, continuing the pattern from January. According to Icelandic Tourist Board figures, tourist departures via KEF were up 42.9% YoY in February. We think it likely that this excess growth in card turnover relative to departure figures stems from the same causes as in January, when card turnover grew 60% YoY and departures by 26%. According to the Icelandic Centre for Retail Studies, the discrepancy in January was due in large part to a surge in airfare purchases, which in turn was probably due to WOW Air’s having opened up bookings to and from San Francisco and Los Angeles. Transactions such as these are routed through domestic acquirers. 

 

Handsome surplus on services trade in the offing

Icelanders’ card turnover abroad totalled over ISK 8.2bn in February, and the card turnover balance (foreigners’ card use in Iceland net of Icelanders’ use abroad) was positive by ISK 4.9bn during the month. This is by far the most positive February card turnover balance yet recorded, and well in excess of the February 2015 balance of ISK 1.5bn. 

The card turnover balance for the first two months of the year was positive by ISK 8.9bn, as opposed to ISK 2.2bn over the same period in 2015. This may well set the stage for the Q1 services account balance, which could turn out the strongest ever recorded for the period. Actually, the outlook is for a record services account surplus this year, and for services trade to generate the entire current account surplus we expect for 2016. On the other hand, surging private consumption growth will play its part in the deficit on goods trade that we expect to see. 


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