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Private consumption in the domestic market still holding its ground

Icelanders’ consumption spending contracted at the beginning of the year, but the downturn was concentrated almost entirely in consumption outside the country. Domestic retail and wholesale trade is benefiting from the abrupt decline in Icelanders’ travel abroad, although the services sector faces a steeper uphill climb. In the past, private consumption has generally tended to exacerbate cyclical fluctuations in Iceland, but this time around it is a countercylical force.

Icelandic households’ consumption in the domestic market has been robust in early 2021, although total consumption is considerably weaker than in 2020, according to newly released payment card turnover figures from the Central Bank of Iceland (CBI) and the Icelandic Centre for Retail Studies (RSV). Turnover involving domestic payment cards totalled ISK 73bn in January, an increase of just over ISK 4bn year-on-year in nominal terms. After adjusting for price and exchange rate movements, however, card turnover was down by nearly 7% YoY.

As before, there was a vast difference between domestic and cross-border developments. The YoY contraction was due entirely to a 47% plunge in overseas turnover. In domestic stores and services companies, however, turnover grew by just over 3% in real terms by that measure. According to the RSV website, card turnover in Icelandic stores rose sharply between years. In ISK terms, the increase measured 29%, with conventional merchants seeing 25% growth and online merchants a whopping 138%. E-commerce has grown from 3% to 7% as a share of total retail and wholesale trade in Iceland during the period, according to RSV figures. Iceland’s services sector did not fare as well, with domestic card turnover figures showing a contraction of 16% YoY, presumably due in large part to public health measures.

To a large extent, payment card turnover figures have developed in line with the path of the pandemic within Iceland. As the chart shows, the contraction in card turnover has generally been greatest around the times when infection rates have been highest. That being the case, it is not imprudent to expect domestic turnover to pick up steadily in the weeks and months to come – provided that the COVID-19 infection rate remains low.

Although consumption using domestic cards in domestic retail and service companies has held its ground reasonably well, the same cannot be said of foreign payment cards. It goes virtually without saying that foreign card turnover evaporated with the collapse in tourist visits to Iceland last year. In January 2021, foreign card turnover within Iceland measured only 1/10 of the total for January 2020. Although Icelanders’ card use abroad fell markedly as well, it was outweighed by the plunge in foreign card turnover, producing a negative payment card turnover balance of ISK 7.2bn this January.

Private consumption set to grow again this year

Card turnover is generally a very reliable indicator of developments in private consumption, as card use is all but universal in Iceland and cards are used for the vast majority of consumption spending. As the chart shows, private consumption figures from Statistics Iceland (SI) have taken a nosedive similar to that seen in real payment card turnover figures over the past few quarters. Private consumption figures for Q4/2020 have yet to be released, but based on card turnover numbers, Icelanders’ private consumption probably contracted by about 3.5% in 2020.

Icelanders’ consumption patterns are affected by a variety of forces at the moment. Unemployment has risen sharply in the past year – to 11.6%, according to the Directorate of Labour’s most recent figures. Furthermore, consumer sentiment plummeted in 2020, according to the Gallup Consumer Confidence Index, although it has recovered somewhat since then. Historically, there has been a fairly strong correlation between consumer sentiment and private consumption, although the link is not an unbreakable one.

On the other hand, most of the households that have not suffered job losses or severe revenue losses from business activities have held their own financially. Real wages have risen in the past year – more rapidly among those who had the lowest pay at the beginning of 2020 than among other groups. For example, private sector pay scales rose by ISK 24,000 on 1 April 2020 and again by the same amount on 1 January 2021, whereas the average wage rise over the same period came to a total of just under ISK 34,000. Furthermore, the Corona Crisis has made little impact on many households’ asset position, as house prices have continued to rise and share prices have tended to rise rather than fall.

As a result, household consumption has a countercyclical impact at the moment. This is a departure from recent business cycles, where private consumption has often fluctuated considerably more than GDP growth has. The contraction is a modest one, and it is concentrated primarily in consumption abroad and in the purchase of services such as performing arts and recreational activities that have suffered from bans on gatherings. The outlook is for private consumption to recover steadily as the year progresses, options for consumption spending such as overseas travel and recreation in Iceland increase once again, unemployment recedes, and consumer sentiment improves further. In our recent macroeconomic forecast, we project that private consumption will grow by nearly 2% this year and over 3% per year in 2022 and 2023.


Jón Bjarki Bentsson

Chief economist