Consumer sentiment brightens as COVID clouds retreat

Consumers are somewhat more upbeat this summer than they were in April, the peak of the COVID-19 pandemic in Iceland. A majority of them now expect economic conditions to improve in the next six months, and more are considering home purchases than in the recent past. But the number planning overseas travel has never been lower than it is right now.


According to the newly published Gallup Consumer Confidence Index (CCI) for June, Icelanders appear to be heaving a sigh of relief as the height of summer approaches. The index rose by a full 16 points between months, to nearly 78. To be sure, it is still well shy of the 100-point threshold indicating parity between optimists and pessimists, but it is particularly noteworthy that consumers who expect the economic and labour market situation to improve in six months’ time outnumber those who expect conditions to deteriorate. This is the first time in two-and-a-half years that the component for six-month expectations has measured higher than 100.

It is often instructive to examine developments during the period after the subindex for the current situation and the subindex for six-month expectations intersect with one another. This last happened in April, when consumers’ assessment of the current situation cratered because of the COVID-19 pandemic. Before then, the two subindices intersected early in 2016, when the assessment of the current situation overtook six-month expectations after the latter had held the upper hand continuously since the end of winter 2008, during the prelude to the financial crisis that struck the following autumn. In other words, this nexus appears to have occurred about half a year before the last recession, while it marks the beginning of this one.

Sign of weak private consumption in 2020

There is a strong connection between developments in the CCI and private consumption, as consumers’ sense of the economic situation and outlook is a major factor in their short-term spending decisions. Based on movements in the CCI in H1/2020, it is fair to expect private consumption to sag this year. This accords with other indicators such as payment card turnover, and it aligns as well with our recent macroeconomic forecast, which assumes a 5.5% contraction in private consumption in 2020 as a whole.

Overseas travel plans hit record low …

Alongside the CCI, Gallup published its quarterly index of major purchase plans, which measures consumers’ plans for big-ticket purchases such as homes, cars, and overseas travel. The big-ticket index has fallen by nearly a third from its March value, driven almost entirely by the collapse in the international travel component. The COVID-19 pandemic has made a profound impact on people’s ability and desire to travel internationally, and even though restrictions are easing, consumers’ appetite for travel will probably take longer to recover.

The subindex for planned travel abroad is now at its lowest since measurements were introduced in 2002. Just over 41% of respondents consider it likely that they will travel abroad in the near future, down from 66% in March. It is also noteworthy that this subindex is now much lower than during the worst part of the 2008 financial crisis, when Icelanders’ purchasing power abroad was slashed in half in a very short time and the economic outlook was stormy at best. If this travel-averse sentiment is as strong in the countries that account for most of Iceland’s tourist visits as it is here, it could take quite a bit longer for Icelandic tourism to recover. On the other hand, the desire to travel could rebound quickly once there are clear signs that COVID-19 is on the wane.

… but home purchase plans are alive and well

It is also interesting to see that consumers’ zest for other major purchases seems relatively undimmed by the bleak short-term economic outlook. The subindex for home purchases actually rose between measurements, with 6.7% of respondents indicating that they will probably enter the housing market soon – presumably a reflection of historically low mortgage lending rates. If this trend proves robust, housing market demand could turn out stronger than has been generally expected since COVID-19 erupted, and this demand would support market prices.

In the same vein, consumers’ car purchase plans are broadly unchanged between measurements. Just under 15% of respondents consider it likely that they will buy a motor vehicle in the near future. This subindex plunged in Q4/2019, but even though the weaker ISK has pushed prices upwards, consumers’ interest in car purchases appears to have recovered.

In sum, Gallup’s most recent measurements indicate to us that Icelanders are planning to furl their sails as regards consumption spending in the near term. In particular, imported consumption such as overseas travel will be put on ice until conditions improve and COVID-19 is firmly in the rear-view mirror. We agree with survey respondents, however, that better times are probably around the corner, and that the recession that began earlier this year will be behind us before 2021 is over.

Author


Jón Bjarki Bentsson


Chief economist

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