It is plain to see that payment card turnover in Iceland and turnover abroad follow two very different paths at the moment. While domestic card use rose by nearly 25% YoY in March in real terms, card use abroad declined by 4% . The latter contraction has only grown stronger in the recent term, too, as monthly overseas card turnover has been down by an average of 50% in the past year. It is hardly bold or prescient to forecast that foreign card turnover is set to rise again soon, but this will depend on vaccination efforts in Iceland and developments in the pandemic in other countries. That said, the boom in payment card use within Iceland reflects a strong shift of spending back into the local economy. Indeed, many domestic sectors have held their own despite the Corona Crisis, and some are flourishing as never before.

In Q1/2021 as a whole, real card turnover within Iceland grew 11% YoY, while overseas turnover shrank by 37%. Therefore, total household card turnover – domestic and foreign combined – grew by 2.8% in real terms in Q1.

COVID in the driver’s seat

To a large extent, payment card turnover figures have developed in line with the path of the pandemic within Iceland. The contraction in card use has been greatest when infection rates have been high. As a result, domestic turnover can be expected to gain steam in coming months, as more people get vaccinated and infection rates (hopefully) remain low in the country.

Private consumption firming up

Developments in private consumption have been interesting in the past year, with a 3.3% contraction in 2020 following an uninterrupted rise lasting nine years. Consumption abroad shrivelled up, while consumption within Iceland more or less held its own. Payment card turnover is the indicator that gives the clearest idea of where private consumption is headed. As the chart shows, the correlation between the two has been quite strong in recent quarters.

At present, consumption is supported by rising real wages among those who have been able to keep their jobs during the Corona Crisis. In essence, then, the crisis has not affected the wallets of the employed to any marked degree. But unemployment has soared to around 11%, according to the most recent figures from the Directorate of Labour.

As we reported recently, the Consumer Confidence Index is now at a three-year high, and this upbeat sentiment together with growth in card turnover has reinforced our expectation of continued growth in private consumption this year. In our macroeconomic forecast from January, we projected private consumption growth at 2% in 2021, and if anything, that forecast may prove to have been overly modest.