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Continued robust GDP growth in Q3

Iceland recorded strong output growth in Q3, driven mainly by exports and private consumption. For the first nine months of the year, GDP growth measured 7.4%, its strongest since 2007. The outlook is for growth to slow markedly in coming quarters.

It is safe to say that national accounts data just published by Statistics Iceland (SI) for the first three quarters of the year reflect the growth momentum in the economy and show signs of increasing demand pressures. In Q3, output growth measured 7.3% and was propelled largely by exports, followed by private consumption. The contribution of investment and public consumption was far smaller and, as in recent quarters, was offset by robust import growth.

As we have discussed recently, the resurgence of tourism as Iceland’s leading export sector was the chief driver of export growth in Q3. In all, exports grew by nearly 23% year-on-year during the quarter. Roughly 9/10 of that growth is due to the surge in services exports, in which tourism plays the leading role, while the other 1/10 stems from increased goods exports.

The period also saw rapid growth in imports, which were up 18% YoY in real terms. On the other hand, the composition of imports was entirely different than on the exports side, with 2/3 stemming from imported services and the other third from imported goods. This difference in composition reflects the differing roles that goods and services trade have played in external trade this year – as was the case before the pandemic, when services account surpluses and goods account deficits tended to play tug-of-war.

Export growth in excess of import growth is then reflected in a positive contribution of net trade to output growth, this time in the amount of 2.5%, the strongest positive contribution since Q4/2019. For the first nine months of the year, however, external trade was not a net contributor to GDP growth, owing to a strongly negative Q1.

Private consumption still going strong

Private consumption grew in real terms by 7.2% YoY in Q3, and by 10.9% YoY in 9m/2022 – Iceland’s fastest nine-month private consumption growth rate in 17 years. This surge in private consumption accords well with other indicators such as payment card turnover, passenger data from Keflavík Airport, and consumer goods imports, all of which suggest that private consumption has been soaring. For example, payment card turnover mushroomed in Q3, particularly card use overseas, which hit a new high in ISK terms, topping ISK 25bn for the first time in June and July.

Most households were quite well positioned financially throughout the pandemic and amassed sizeable savings. Presumably, consumers are thoroughly enjoying their first summer without public health restrictions, as the numbers show clearly. Despite high inflation, rising interest rates, and dwindling expectations, the majority of households are in good financial shape at the moment. It must be considered likely, though, that private consumption growth will ease in coming quarters; for instance, card turnover has lost a little momentum and household sentiment has sagged recently.

Investment growth has been modest recently

Investment grew by only 2.2% in Q3, but because quarterly investment data tend to fluctuate widely, it is more useful to consider the first nine months of the year as a whole. During that nine-month period, total investment growth measured 5.2%, reflecting growth in business and public investment measuring nearly 8% and nearly 12%, respectively, offset by a contraction of more than 5% in residential investment.

However, these figures are affected by an accounting transfer made by SI, in which certain real estate was reclassified and moved from the business sector to the public sector. If these effects are ignored, business investment grew nearly 6% in Q3, while public investment contracted by 0.7% over the same period. The underlying trend in investment was therefore in the direction of stronger business investment and, by the same token, weaker growth in public investment than is indicated by the numbers above, although the overall situation is unchanged.

Residential investment to gather pace in the near future

As is noted above, residential contracted by more than 5.4% YoY in 9m/2022. The number of new properties available on the market has been limited, although supply has been on the rise recently. These figures took us by surprise, as the tally carried out in September by the Housing and Construction Authority and the Federation of Icelandic Industries indicated that the number of homes under construction was up 35% between years. As a result, we think it likely that residential investment will gain momentum in Q4 and that growth will also shift more firmly to 2023. Even though the housing market cooled suddenly this summer in response to higher interest rates and tighter borrowing requirements, demand remains strong, and it is clear that increased supply will be needed to address this demand.

SI’s data indicate that Icelandic has righted itself after the Corona Crisis – and with room to spare, in some segments of the economy. GDP, for instance, was nearly 4% stronger at constant prices in Q3 than over the same period prior to the pandemic, although per capita GDP was a full 2% lower by the same measure.

The outlook is for significant YoY growth in the final quarter of the year, if indicators of private consumption, investment, and services exports in Q4 to date can be relied upon. Nevertheless, import growth will tip the scales in the opposite direction, as can be seen in this morning’s update of SI figures on goods trade in October, which show an all-time record goods account deficit of over ISK 58bn. In our macroeconomic forecast from late September, we projected year-2022 GDP growth at just over 7%. SI’s figures for the first nine months of the year suggest that this forecast will prove quite accurate. For the two years to follow, the outlook is for a much slower pace of growth.


Jón Bjarki Bentsson

Chief economist


Bergþóra Baldursdóttir