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Icelandic Financial Market Digest 09. janúar

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

Deficit on goods trade grew 60% in 2017

Iceland’s deficit on external goods trade grew by 60% year-on-year in 2017, to ISK 172 bn, and rose to a ten-year high relative to GDP. The current account balance was strongly positive, however, thanks to a sizeable surplus on services trade. 

Large year-end goods account deficit 

According to newly published preliminary figures from Statistics Iceland (SI), the deficit on goods trade measured just over ISK 20 bn in December, more than twice that in December 2016 and somewhat above the 2017 average. The large deficit in December is due to relatively strong imports – particularly imports of commodities, operational inputs, and transport equipment – coupled with unusually weak marine product exports. 

Goods imports totalled ISK 61.8 bn in December, while goods exports amounted to ISK 41.7 bn. Transport equipment imports were probably affected by the changes to public levies on rental cars taking effect at the year-end. 

Largest goods account deficit in a decade

Last year’s goods account deficit totalled ISK 172 bn, as opposed to just over ISK 108 bn in 2016. In ISK terms, the deficit on goods trade is at an all-time high, and as a share of GDP it measured 6.8% in 2017, the highest ratio in a decade. 

The increased deficit is due to divergent developments in imports versus exports of goods over the past year. Statistics Iceland (SI) has published a breakdown of volume and price developments in goods trade for the first ten months of 2017. According to those figures, export volumes were virtually unchanged YoY over that period, while imports grew by 10%. Such developments are a familiar accompaniment to a rising real exchange rate, and indeed, Iceland’s real exchange rate was an average of 12% higher YoY in terms of relative consumer prices, the highest by that criterion in a decade. 

Consumer goods imports grew noticeably faster (20%) than other imports. In particular, imports of motor vehicles for private use grew strongly (40%), as did imports of consumer durables such as household appliances (23%), although growth in food and clothing imports was also robust, at 17% for each. On the other hand, investment goods imports slowed down markedly, growing by just over 6% in volume terms in the first ten months of 2017, down from nearly 19% in 2016, indicating how much investment growth has subsided between years. 

In our opinion, this surge in consumer goods imports reflects two underlying factors: first of all, private consumption grew strongly in 2017, reaching a ten-year high in terms of its contribution to GDP growth; and second, the tourism boom has called for increased imports to support visitors’ consumption in Iceland. 

Current account surplus, courtesy of tourism

Broadly speaking, then, it can be said that the composition of the balance on goods reflects a shift from export- and investment-driven GDP growth to growth that is driven more by household consumption and investment. 

Fortunately, the high real exchange rate has not yet begotten a contraction in services exports, as rapid growth in tourism is the main cause of the sustained current account surplus of the past five years. We estimate last year’s surplus on services trade at just over ISK 270 bn and the current account surplus at roughly ISK 100 bn. The outlook is for tourist arrivals to continue increasing this year, albeit at a markedly slower pace than before. On the other hand, the deficit on goods trade could keep growing, giving rise to a smaller current account surplus in 2018 than in 2017.

 

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