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External trade bounces back, thanks to tourism

Iceland recorded a surplus on goods and services trade in Q3, after a deficit in the first half of the year, with tourism weighing in as the major contributor. Exports are now gaining steam after sustaining all but a knock-out punch during the pandemic. In spite of this positive turnaround in H2, the balance on goods and services will probably show a deficit for 2021 as a whole, but the outlook is for surpluses in the years thereafter.

After showing a sizeable deficit in H1, the trade balance flipped to a surplus in Q3/2021. The combined surplus amounted to ISK 12.9bn, with a goods account deficit of ISK 47.4bn more than offset by a services account surplus measuring ISK 60.3bn. The balance on services was at its strongest since before the pandemic, and for familiar reasons.

Tourism gains moment

The vast majority of the surplus stemmed from a nearly ISK 57bn surplus on travel-related services and a more than ISK 17bn surplus on passenger transport by air. It has been two years since Iceland saw a surplus of this size – a reflection of the well-known impact of the pandemic on tourism in Iceland and around the world.

Apart from tourism, there was a surplus of nearly ISK 2bn on information and communications technology-related services trade and a similar surplus on cross-border financial services. Cross-border research and development expenses net of revenues were unusually high, however, at -8.7bn, and net revenues from intellectual property use were unusually slim, although the latter do fluctuate widely from quarter to quarter.

Although Icelanders’ famed wanderlust was well in evidence last summer relative to the preceding quarters, it made little impact against the boom in foreign tourists’ visits to Iceland. A total of 370,000 tourists came to Iceland in Q3, making it the strongest quarter since Q4/2019. In addition, revenues generated per tourist were much higher than before the pandemic, as we have discussed in.a recent issue of Icelandic Market Daily.

Exports on the rise

On the whole, exports have gained considerable momentum after the heavy blow dealt by the pandemic last year. Total exports of goods and services came to just over ISK 356bn in Q3, the largest total in ISK terms in two years. The fact that the ISK was, on average, nearly 7% weaker in Q3/2021 than in 2019 – the last full year before the pandemic – is certainly a factor, though.

Market prices have also been favourable for the aluminium industry, with exports totalling just over ISK 79bn during the period, an increase of 60% year-on-year. However, there was a marginal YoY contraction in revenues from marine product exports, which totalled just under ISK 65bn in Q3. In recent quarters, the trend has been generally upwards, though, and exports totalled ISK 286bn from Q4/2020 through Q3/2021.

Deficit in 2021, but a surplus is in sight

This year looks set to be Iceland’s second in a row to see a deficit on combined goods and services trade. Developments within the year are favourable, however, after a deficit of ISK 83bn in H1. It appears that Q4 will be a stronger quarter for tourism than we had expected, and the goods account deficit in October was the smallest since April. Therefore, at a glance, it looks possible that goods and services trade will be broadly in balance in Q4/2021.

The outlook for external trade further ahead is also favourable. It appears that Iceland will have a bountiful capelin season this coming winter and strong growth in marine product exports in the year to come, in contrast with our macroeconomic forecast from September. Furthermore, tourist numbers are more likely than not to surge next year, although uncertainty about the pandemic makes prospects for tourism uncertain as well. And finally, aluminium prices are quite high in historical terms, although they have tapered off from this year’s peak. On the other hand, the price of various imported inputs has risen steeply in the recent past.

On the whole, we estimate that the surplus on goods and services trade could lie in the ISK 80-100bn range in 2022 and widen still further in 2023. The outlook for external trade is therefore positive, and barring a deep and protracted setback due to the pandemic, the Icelandic economy is heading rapidly towards a hefty surplus like those seen in the decade before COVID came to town.


Jón Bjarki Bentsson

Chief economist