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Autumn sees record deficits on goods trade

A large and growing goods account deficit is probably a factor in the weakening of the ISK over the past few months. Expenditures relating to goods imports have grown apace, as import prices have risen concurrent with growth in import volumes. This year’s current account deficit could turn out larger than last year’s in spite of the swift recovery of tourism.

According to preliminary figures from Statistics Iceland (SI), Iceland’s goods trade generated a deficit of nearly ISK 53bn in October, the largest single-month deficit in the history of SI data. This record-breaking deficit comes on the heels of a nearly ISK 44bn deficit in September, indicating that FX outflows due to goods trade have been strong this autumn.

The gaping October deficit was due both to unusually strong imports and relatively weak goods exports during the month. Goods exports totalled just under ISK 79bn but were dwarfed by goods imports, which came to ISK 131bn.

Imports growing by leaps and bounds

Goods imports have been growing at a dizzying pace recently, setting records in both September and October. In ISK terms, total goods imports were up 53% year-on-year in October, with a strong increase across virtually all categories, according to SI accounts. Oil and fuel imports stand out, however, having more than trebled between years, and imports of investment goods other than ships and aircraft were up 60% YoY at the price level of each year.

As regards fuel and oils, the surge reflects both increased volume and higher prices. The resurgence of tourism as Iceland’s leading export sector has called for a massive increase in importation of jet fuel at a time when the price has doubled year-to-date and has seldom been higher.

The same can be said of other fossil fuels and related products, which were imported to the tune of nearly ISK 28bn in October – a figure that corresponds, for instance, to more than a third of total goods export revenues for the month.

The jump in imported investment goods need not give cause for major concern, as the inputs brought into the country presumably boost economic activity in Iceland, including export activity, in the long run. As a result, the higher short-term cost of these inputs may well turn out to be a good investment. But the import boom also reflects both widespread price hikes and, to some extent, Icelanders’ recent appetite for consumption. In October, for instance, imports of generic consumption goods were up 13% YoY in ISK terms.

Divergent developments in aluminium and fish prices

As we have discussed recently, the price of Iceland’s leading export products has been quite volatile in the past few quarters. But in recent months, aluminium prices have sagged again, while marine product prices have held relatively high. The figures from October reflect this in part. Aluminium exports totalled a scant ISK 25bn, the lowest figure in ISK terms in nearly a year. Marine product exports, however, delivered the equivalent of nearly ISK 30bn in revenues in October, the equivalent of a 12% YoY revenue boost despite the reduced groundfish quota and a stronger ISK during the period. After adjusting for exchange rate movements, however, the increase measures 17%.

Growing goods account deficit a probable drive or the exchange rate

The goods account deficit has widened steadily over the course of this year, measuring ISK 50bn in Q1 and ISK 64bn in Q2 before swelling to ISK 95bn in Q3. There are probably several reasons for this:

  • The boom in services exports – tourism in particular – calls for significantly more imported goods. According to SI, this shows in an improving services account balance and a growing goods account deficit.
  • Relative developments in exported and imported goods prices have been unfavourable in recent months. Aluminium prices have fallen markedly after the increase this spring, while the price of fuel and other inputs has remained high.
  • Domestic demand – including both investment and consumption – appears to have been more robust in recent months than we had expected, after a strong H1.
  • The reduced quota for groundfish – cod in particular – has brought with it a contraction in export volumes, although fortunately, it is offset by high prices.

The 10m/2022 deficit on goods trade measured ISK 262bn, up from ISK 185bn over the same period in 2021. This brings it to the level we had forecast for 2022 as a whole, and presumably it will increase still further in the final months of the year. Although the tourism-generated improvement in the balance on services will probably do much to offset a fat goods account deficit in H2, it seems quite clear that the current account will show a sizeable deficit for 2022.

This goods account deficit is presumably one of the drivers of recent exchange rate developments. Since the beginning of summer, the ISK has depreciated by nearly 7% against major trading partner currencies and is now broadly where it was at the beginning of the year.

In our most recent macroeconomic forecast, issued in September, we projected that this year’s current account balance would be negative by ISK 55-60bn, or 1.5% of GDP. This is about the same outcome as in 2021. The deficit will probably turn out somewhat larger than we forecast in September, and although prospects for external trade in 2023 will probably improve, the outlook is also more ambiguous than we assumed earlier this autumn.


Jón Bjarki Bentsson

Chief economist