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Upbeat consumers planning to dust off their wallets

Icelandic consumers are optimistic about the economic and employment outlook, and just over half of them consider the current situation favourable, according to Gallup. Ever-increasing numbers are eyeing possible overseas travel, motor vehicle purchases, and home purchases. The outlook is for brisk growth in private consumption this year, perhaps outpacing our May forecast.

According to the Gallup Consumer Confidence Index (CCI) for June, Icelandic consumers remain upbeat about the economy and the employment outlook. The numerical index value actually dipped marginally between months (from 134 points to just under 132), but the May measurement was also the highest since the beginning of 2018. In spite of the slight drop, the current CCI measurement bears witness to widespread optimism about the coming term, and the sub-index measuring the assessment of the current situation rose above the 100-point parity threshold for the first time since Q1/2020. In other words, those who consider the current situation positive slightly outnumber those who consider it negative.

There is a strong correlation between the CCI and developments in private consumption, as consumers’ expectations are shaped largely by factors such as exchange rate developments, the inflation outlook, the labour market situation, and – naturally – big news such as global pandemics. As a result, private consumption can be expected to keep gaining steam in coming months, much as it has been in the recent past. It grew marginally year-on-year in Q1/2021, which was the first quarter since the onset of the pandemic to see positive growth in private consumption.

Given how sharp the contraction was in Q2/2020, and in view of recent payment card turnover data, we expect a surge in private consumption growth in Q2/2021. However, the newest CCI measurements, plus the most recent big-ticket index measurement, discussed below, suggest that the growth rate will remain strong. Private consumption growth in 2021 as a whole could turn out markedly above the 2.9% we projected in our macroeconomic forecast from May.

Upswing in overseas travel?

The last CCI measurement in each quarter is always interesting, as it is accompanied by the quarterly big-ticket index value, which weights together consumers’ responses concerning planned major purchases such as motor vehicles, housing, and overseas travel. As the chart indicates, the big-ticket index jumped between March and June and is now at its highest since the pandemic struck.

All components of the big-ticket index rose between measurements, but the most pronounced increase was in the sub-index for overseas travel. As could be expected, the travel component collapsed when the pandemic blew into town, and it has remained unusually low until now, as travel has been risky and, in some cases, impossible.

Over half of Icelanders are now considering international travel in the months to come, up from a low of 32% last autumn. After this week, roughly 9 of every 10 Icelanders aged 16 and over will be fully vaccinated, making overseas travel simpler and safer for most people than it was only a few months ago. Furthermore, the number of countries and regions labelled as green zones on the European Centre for Disease Prevention and Control’s COVID-19 map is rising steadily. On the other hand, the pandemic is gaining momentum yet again in the UK, and the US is still more or less closed to Icelandic travellers. So worldwide travel has yet to return to the level of freedom and low risk seen at the beginning of 2020, but the trend is certainly positive, and the Gallup survey indicates that Icelanders are planning to take full advantage of the opportunities available.

Car purchases on the rise

Icelanders have also shown more interest in car purchases in the recent term, and the vehicle purchase component of the big-ticket index is now back to its pre-pandemic level. According to a recent news release from Bílgreinasambandið (the Icelandic association of motor vehicle sales and service entities), sales of passenger cars to individuals were up nearly 11% year-on-year in H1/2021. In the month of June, however, the YoY increase measured nearly 42%. Ironically, sales of new cars to individuals rose by 7% in 2020, in spite of the pandemic. If the Gallup measurement is any predictor, dealerships and car sales companies will have plenty of business on hand in the months to come.

In addition, the sub-index for planned home purchases rose markedly between measurements and is now roughly where it was in mid-2020. Just under 7% of Icelanders are in house-buying mode at the moment, according to Gallup. Demand for residential property therefore appears to be doing anything but declining, notwithstanding the Central Bank’s (CBI) policy rate hike in May. It will be interesting to see whether the CBI’s newly announced decision to lower the maximum loan-to-value ratio from 85% to 80% (for most buyers) will turn down the heat on the housing market. The CBI can also be expected to take further action in H2 if house price inflation does not ease significantly in the coming term, according to remarks recently made by the Governor.


Jón Bjarki Bentsson

Chief economist