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Consumers push on despite headwinds

Icelanders appear to be relatively upbeat in spite of strong headwinds and a highly uncertain near-term economic outlook.

Icelanders appear to be relatively upbeat in spite of strong headwinds and a highly uncertain near-term economic outlook. Their interest in house purchases, overseas travel, and car purchases has picked up, perhaps indicating that they think they have some scope to step up consumption spending as the year progresses, after having tightened their belts in H2/2018.

Pessimism has subsided

The Gallup Consumer Confidence Index (CCI), published this morning, rose by just over a point in March, to 91.6. This leaves it somewhat below the 100-point threshold indicating parity between upbeat and downbeat sentiment among consumers. Even so, consumer sentiment has rallied recently after bottoming out in November, when the CCI measured 75.8 points. The index has therefore risen by 16 points in the past four months.

Private consumption and the CCI tend to correlate strongly, as expectations about the economic and labour market outlook tend in general to have a considerable impact on households’ short-term spending behaviour. As the chart shows clearly, private consumption growth has softened in recent quarters, concurrent with the drop in the CCI. It could therefore be that the past few months’ rise in the index is a sign that consumer pessimism has hit bottom and consumption will start to pick up later this year.

More consumers want to travel, buy a car, or move house

Gallup also published its quarterly major purchase index measurements this morning. And sure enough, Icelandic households appear keener to buy big-ticket items than they have been in recent quarters. The major purchase index now measures 69.2, its highest since autumn 2017. The index measures Icelanders’ plans to travel abroad, purchase motor vehicles, and purchase homes, and all three of these components have risen since the last measurement.

Until now, downbeat sentiment has had little impact on Icelanders’ desire to travel. Overseas travel has increased steadily in the past five years. But in spite of a quarter-on-quarter rise, this component of the index is somewhat lower now than it was a year ago. Nearly four out of every five respondents consider it very likely or somewhat likely that they will travel abroad in the near future.

Icelanders have bought fewer motor vehicles in the recent past –  new vehicle registrations were down 37% year-on-year in the first two months of 2019, for instance – but according to responses to the Gallup survey, car dealers may soon find they have something to celebrate, as the index component measuring planned vehicle purchases rose by more than 3 points, to its highest level since Q4/2017.

And finally, the housing market may liven up as the days grow longer, if responses to survey questions on planned home purchases are any indication. The house purchase component rose by 2 points in March and is now at its highest since Q4/2016.


Jón Bjarki Bentsson

Chief economist