Icelandic consumers are optimistic about the economy and the employment outlook, according to recently published Gallup Consumer Confidence Index (CCI) data for January. The index value fell marginally between months (from 122 to just under 120) but is still well above the 100-point threshold indicating parity between upbeat and downbeat sentiment. The CCI has now been above the 100-point threshold since February 2021. Sentiment among Icelanders deteriorated in mid-2018, when the index fell below 100 for the first time in three years. It plunged again at the beginning of the pandemic, bottoming out at 43.8 points in August 2020.
Consumer Confidence Index shows optimism among households and businesses
Sentiment has been upbeat among households and businesses recently, suggesting that domestic demand will keep growing in the coming term. Domestic demand was brisk in 2021, the pandemic notwithstanding. It is actually astounding how well most households and businesses came through the Corona Crisis, given the outlook at the onset of the pandemic.
Clearly, Icelanders are confident about the economic outlook further ahead. The index component for expectations six months ahead is high, at 133.5 points, whereas the assessment of the current situation, at 99.3, is below the 100-point mark for the first time since May 2021. The Gallup survey was conducted during the period 5-11 January, when the Omicron wave of the pandemic was gaining momentum and the outlook was for tightened public health measures – which were indeed introduced on 15 January. At that time, many survey respondents considered the situation worse than in the months beforehand but expected them to improve in the coming term.
Businesses similarly upbeat
In Gallup’s quarterly survey among executives from Iceland’s largest firms, conducted on behalf of the Central Bank (CBI) and the Confederation of Icelandic Employers (SA), respondents tell more or less the same story. Executives’ expectations concerning near-term economic conditions have risen markedly in recent quarters, as the chart shows. The assessment of the current situation has shifted accordingly, and at the end of 2021, when the most recent survey was taken, a majority of executives considered conditions favourable despite the persistence of the pandemic.
The survey indicates that firms generally expect an upturn in domestic demand in the next six months. Just under half of executives anticipate that domestic demand will grow over this period, and another scant half expect it to remain flat. Only a very few expect demand to contract.
Domestic demand growth continues apace
Increased optimism among households and corporate executives goes hand-in-hand with growth in demand, and is therefore a good indication of strong investment and rising private consumption in the quarters to come.
Among households and businesses alike, domestic demand picked up strongly in 2021. For instance, business investment grew by just under one-fourth in the first nine months of 2021, after contracting more than 30% in the three years beforehand. Figures for Q4/2021, which will be published at the end of this month, are likely to show an overall growth rate of around 20% for the year.
The same can be said of households, as can be seen clearly in last year’s private consumption data. In the first nine months of the year, private consumption grew 5.4%, and many indicators imply a similar growth rate for 2021 as a whole. According to this, not only did the 2020 contraction reverse in full; there was a sizeable increase relative to 2019. It is actually astounding how well most households and businesses weathered the crisis, given the outlook at the onset of the pandemic.
The CCI and other economic indicators all suggest that further private consumption growth is in the offing. In spite of everything, real wages are still growing, payment card turnover has been rising rapidly, and unemployment has plummeted. In our newly published macroeconomic forecast, we project that private consumption will continue to grow steadily in coming years. We forecast private consumption growth at just over 4% in 2022, 3.5% in 2023, and just over 3% in 2024.
