Are consumers gearing up to ration their consumption spending?

Recent expectations surveys suggest that Icelandic households are preparing for difficult times ahead and are planning to scale down purchases of big-ticket items such as motor vehicles and overseas travel. Resilient private consumption and growing pessimism have characterised the economic situation in many countries recently. For Iceland in 2023, the outlook is for private consumption to grow at less than half the rate recorded in 2022.

Icelanders’ expectations regarding the economy and labour market improved slightly at the beginning of the summer. The Gallup Consumer Confidence Index (CCI), just published, rose by 3 points in June, after declining steadily in the four months beforehand. Even so, as regards their view of economic developments and prospects, pessimistic households outnumber their more optimistic counterparts, as they have for the past year or more. The most recent CCI value is 81.1 points, well below the 100-point threshold between upbeat and downbeat sentiment.

Big-ticket purchases relegated to the back burner

Gallup has also just published its most recent data on consumers’ planned major purchases, including motor vehicles, overseas travel, and homes. If that measurement is any indication, consumers are continuing to scale down their big-ticket purchases, as the major purchase index is at its lowest since 2021. That said, the current measurement is not particularly low in historical context, as the chart shows.

The component for planned home purchases has fallen the most. Some 4.4% of respondents considered it more likely than not that they would buy a home in the near future. For comparison, the same ratio was 7.1% in autumn 2020. Naturally, conditions in the housing market have changed radically since then: house prices are up, as are interest rates on new mortgage loans, and borrowing requirements have been tightened.

Car purchases and overseas travel constitute a large share of Icelanders’ imported consumption, and rapid growth in both items has helped to fuel the recent current account deficit. That being the case, a decline in this type of consumption growth – not to mention an outright contraction – could make a real difference in the current account balance. Households’ new motor vehicle purchases actually took a sizeable jump in May, after contracting for several months beforehand. Presumably, though, most of those purchases had already been decided upon and may well have been finalised some time earlier. In any event, just over 12% of respondents plan to buy a car in the coming months, the smallest percentage in three years.

Developments in the CCI and the big-ticket index accord well with other current indicators of developments in private consumption, and they all suggest that Icelanders’ Q2/2023 consumption spree is abating. For instance, households’ payment card turnover contracted year-on-year by an average of over 5% in real terms in April and May. Real wages contracted by an average of 0.2% over the same period. Private consumption grew by just under 5% in Q1/2023, after increasing by nearly 9% in 2022; however, the growth rate is expected to be much weaker for the remainder of the year. In our most recent macroeconomic forecast, we projected that private consumption would grow by 3.2% in 2023, and be driven mainly by population growth. However, consumption per capita will probably change relatively little between years.

Vibecession – a crisis of mindset?

Robust private consumption growth and a high employment level concurrent with relatively muted expectations are not a uniquely Icelandic phenomenon these days. Similar patterns can be seen widely in neighbouring countries, somewhat confounding economic analysts. Forecasts of contractions in various economies are based not least on adverse developments in household and corporate expectations surveys. Yet the expected crisis has not yet materialised in most economies.

Foreign analysts have dubbed this phenomenon vibecession, which can be characterised as a crisis of mindset.  Potential explanations include the series of shocks striking the global economy since the beginning of the decade – a global pandemic, the Ukraine war, a hefty inflation spurt, and interest rate hikes – each coming right on the heels of its predecessor, sustaining uncertainty levels and preventing the public from experiencing the economy as reasonably well balanced. 

In particular, may observers have cited the inflation episode that has plagued countries around the world recently and called forth steep interest rate hikes after a decade of modest inflation and relatively low interest rates. Because wages have hardly kept pace with inflation in most markets outside Iceland, many observers point the finger at declining real wages, which appear to weigh heavier than a high employment level in consumers’ minds. Households therefore appear to have responded to higher prices by tapping their pandemic-era savings, which may explain the mismatch between real wage growth and expectations, on the one hand, and developments in consumption, on the other. Fortunately, real wage growth has begun to move in the right direction again in most markets, fuelled by declining inflation and more rapid wage increases than in the recent past. In the wake of this, expectations have begun to rise again in leading advanced economies.

It will be intriguing to see whether the link between expectations and private consumption remains as strong as it has been in the past. As yet, however, most indicators imply that, as before, the downturn in sentiment will generate a period of weaker private consumption growth among Icelanders.


Jón Bjarki Bentsson

Chief economist