Icelandic Financial Market Digest 24. október

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

Purchasing power spikes in September

Even though purchasing power has grown apace in the recent term, private consumption is growing even faster at present. The outlook is for a slowdown in private consumption growth and purchasing power in the coming term, and for both to be better aligned than they have been recently. 

The Statistics Iceland wage index rose by 0.8% in September. As is often the case at this time of year, irregular payments (fish industry workers’ bonuses, shift differentials, etc.) explain the lion’s share of the increase, whereas contractual pay rises had little impact. The month-on-month increase is somewhat larger than that in September 2016 (0.6%), pushing the twelve-month pace of the rise in the wage index upwards from 7.2% to 7.4%. 

The consumer price index rose only by 0.1% in September, however, and real wages therefore rose 0.6% MoM. In the past twelve months, the wage index has been rising at a fairly steady pace, but headline inflation fell from 1.7% to 1.4% in September, boosting the twelve-month rise in real wages to 6.0%. 

Private consumption growth outpaces growth in purchasing power

In 2017 to date, real wages have grown somewhat more slowly than private consumption. Early in the decade, these two variables tracked one another quite reliably, however, and households were not taking on additional debt to finance their consumption – on the contrary, they stepped up their saving and paid down debt. This trend has reverse, however, and there are signs of an upturn in household debt this year. 

We expect private consumption to rise considerably faster than real wages (8.0% and 5.0%, respectively) in 2017 as a whole, which means that households will consume more than they can afford to. If our macroeconomic forecast from September materialises, however, these variables appear set to align more closely in the next few years, with both private consumption and purchasing power growing significantly slower than in the recent past. 


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