According to newly published figures from the Central Bank of Iceland (CBI), Icelanders spent over ISK 110bn with their payment cards in October, an increase of 12% between years, or 3% in price- and exchange rate-adjusted terms. By the latter measure, the YoY growth rate has not been this sluggish since February 2021.
Card turnover abroad hits all-time high
Payment card turnover grew by 3% year-on-year in real terms in October, below the pace seen in the recent past. The growth rate for the month is due to card use abroad – no surprise, given that a record number of Icelanders travelled abroad in October. The outlook is for slower private consumption growth in coming quarters.
As in the recent past, the increase between years is due primarily to an enormous leap in spending abroad. In real terms, card use within Iceland actually contracted by nearly 3% YoY, while card use abroad was up nearly 29%. Growth has been easing slightly in the past few months, but in ISK terms, card turnover overseas is at an all-time high.
Record number of trips abroad in October
The fact that card use abroad should be the mainstay of payment card turnover is unsurprising. As we have discussed recently, close to 72,000 Icelanders travelled abroad in October, setting a new single-month record. Nearly one of every five Icelanders left the country during the month, although it is quite possible that some people travelled abroad more than once in October.
Icelanders’ payment card use abroad has been growing by leaps and bounds, as the chart indicates, and even though the pace of growth is easing, card turnover in ISK terms has hit new highs in the past several months. Appetite for travel is the main driver of the increase, although shopping with foreign online merchants is also a major factor. This boom in overseas card turnover probably plays a role in the past few months’ depreciation of the ISK. Since the beginning of summer, the ISK has depreciated by nearly 9% against major trading partner currencies and is now broadly where it was in March 2021.
Private consumption in overdrive
Private consumption grew by 11% YoY in H1/2022, including 13.5% in Q2, the fastest growth rate in 17 years. Presumably, Icelanders have taken advantage of the first summer without pandemic-era restrictions, and furthermore, many households withstood the pandemic very well and built up hefty savings.
The outlook is for considerably slower private consumption growth in Q4/2022, as is borne out by newly published card turnover figures. In addition, consumer sentiment has been at a low ebb in recent months, and real wages have fallen by some measures.
Consumer sentiment has probably been affected strongly by recent inflation and the economic situation in trading partner countries, many of which are facing the prospect of a difficult winter. Further examination of data on real wages shows the they have certainly shrunk in terms of the CPI, but in terms of both the CPI excluding housing and the EU’s Harmonised Index of Consumer Prices (HICP) they have risen in the past year. This is likely one of the reasons for the recent resilience of private consumption.
In our macroeconomic forecast from September, we projected that private consumption would ease in Q4, yet even so, it will grow by nearly 9% YoY. For 2023, we had projected a growth rate of just under 2%, with households drawing down their savings to a large degree. We are still convinced that this is the likely outcome.