GDP growth for the first three quarters of 2021 measured 4.1%. Domestic demand has been the main driver of growth, but exports have been gaining momentum. The contribution of net trade to output growth has been negative in 2021 to date, as imports have grown faster than exports. It could be said that developments have been the reverse of what we expected at the beginning of this year, as the recovery of domestic demand is taking place earlier than we anticipated, stimulating imports and eroding the contribution from net trade.

Private consumption picking up strongly

Private consumption growth is sailing along at a good clip, according to SI’s new figures, measuring 6.1% YoY in Q3, after hitting 8.8% in Q2. For the first three quarters combined, it measured 5.4% YoY in real terms, making a strong contribution to GDP growth for the period. In our opinion, this is due for the most part to three main factors: First, most households were financially strong at the beginning of the pandemic, and developments in asset markets have strengthened rather than weakened that position. Second, the authorities’ mitigating measures were very successful in blunting the pandemic’s impact on the households hit hardest by it, whether directly or indirectly.

Third, real wages have risen overall despite the economic setback, which may well be a first for Iceland. Private consumption has therefore dampened the contraction by sustaining demand for domestic goods and services, yet it is also boosting growth at the moment. Fortunately, households can generally afford this burst of consumption, as they are buoyed up by real wage growth and significant accumulated savings.

Investment gaining steam

Investment has bounced back with a will this year, after a deep slump in 2020. The figures are slightly distorted, though, because SI now records Icelandic airlines’ fleets as investment to a greater degree than before, and as leased investment goods to a lesser degree. But this investment is recognised almost entirely with imports and therefore has no effect on GDP growth. In all, investment grew by 13.3% in the first three quarters of 2021.

As is mentioned above, the accounting treatment of large transport equipment somewhat affects SI’s business investment figures. Nevertheless, general business investment is growing apace, and excluding energy-intensive industry and the aforementioned large transport equipment, it grew by nearly 22% in the first nine months of this year. On the whole, growth in business investment measured 24.4% for the period, however.

Public investment is also on the move, owing to investment initiatives introduced as part of the economic response to the pandemic. In the first three quarters of 2021, it grew by 9.9% YoY. According to SI’s press release, State investment thus far in 2021 has been reasonably well in line with estimates, while municipal investment has grown much more slowly than projected. The peak of the pandemic-related investment initiative could therefore come slightly later than previously thought.

Residential investment has been more sluggish recently, however, contracting by 7.5% in real terms in the first nine months of 2021, including about 9.8% in Q3. SI mentions, however, that the number of issued building permits has increased markedly in the recent term, which is a good sign for residential investment further ahead. In Q3/2021, for instance, the number of residential units in construction stage 1 was up more than 80% YoY. As this indicates, it would appear that a surge in residential construction is in the offing.

Positive turnaround in external trade

As we have discussed recently, the uptick in tourist arrivals since mid-year has already made its mark on external trade. For example, the quarterly contribution of net trade to output growth was positive for the first time since Q4/2019.

But largely because of the surge in goods imports, total imports have grown faster than exports year-to-date, and the contribution from net trade has therefore been negative for the first three quarters combined. Things are looking up, though, in our opinion: services exports are likely to continue growing, and import growth could lose pace in Q4.

Economic recovery set to continue

Iceland’s economic recovery appears to have settled into a healthy pace in spite of intermittent heavy weather in the fight against the pandemic thus far in 2021. As is mentioned above, GDP growth for the first three quarters of 2021 measured 4.1%. This is broadly in line with our recent forecast – and if anything, somewhat more positive. Thus the outlook is for year-2021 GDP growth to measure close to the 4.2% that we projected this autumn.

Furthermore, the near-term outlook is positive, provided that the most recent twists and turns in the pandemic do not pose any long-term difficulties. Nevertheless, the most likely scenario features strong growth in 2022, with external trade in the driver’s seat, fuelled by a vast increase in tourist numbers, a booming capelin season, and continued growth in industrial and intellectual property exports, among other factors. The outlook is also for robust growth in private consumption and residential investment. According to our forecast, GDP growth will measure 4.4% in 2022, supported by a strong capelin season, and based on these projections, real GDP will be slightly higher than in 2019. Growth is set to ease thereafter, as tourism and domestic demand rebalance, and we expect GDP growth to measure 3.0% in 2023.