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Growth in payment card turnover set to lose steam

Payment card turnover increased somewhat year-on-year in March, according to recent figures from the Icelandic Centre for Retail Studies, although in real terms, the growth rate measured 11%, slightly less than in the previous two months. Card turnover growth is likely to lose pace in coming months, as the effects of retroactive pay rises subside and higher interest rates start to affect Icelanders’ consumption behaviour.

According to data from the Icelandic Centre for Retail Studies, payment card turnover within Iceland totalled ISK 108bn in March, an increase of 21% YoY, or 11% in price-adjusted terms. Growth has eased relative to previous months, but it picked up again strongly in January and February. The main reason for the surge is the retroactive pay rises received by most workers in connection with new wage agreements finalised at the beginning of the year.

Turnover with domestic payment cards totalled just over ISK 86bn, an increase of 5% in real terms, while turnover with foreign cards came to just over ISK 22bn, an increase of 45% in real terms. This major increase in foreign card use in Iceland is due primarily to [base effects from] the pandemic and the war in Ukraine, both of which cut back on foreign tourists’ visits to Iceland. Foreign payment cards account for about 20% of total turnover, and Icelandic cards represent the other 80%.

Trade and services turnover on the rise

Turnover with domestic payment cards was split more or less equally between trade and services. Trade-generated turnover came to just over ISK 46bn in March, an increase of nearly 14% YoY. Groceries and supermarkets accounted for about half of trade-related turnover, with an increase of 21% YoY in nominal terms. The second-largest item is “other trade”, which captures public levies and cash withdrawals. But growth was strongest in sales of gifts and souvenirs, which increased 74% YoY. Duty-free shopping and purchases of electronics and home appliances increased as well, by 30% and 16%, respectively. The only trade-related item to contract between years was housewares.

Services turnover totalled almost ISK 41bn in March, an increase of 14% YoY. The largest services component is “other services”, which captures a range of items such as construction services, financial and insurance activities, and medical and dental services, among others. This component accounts for around 39% of total turnover in services trade. Nearly all categories of services grew between years, although the increase was greatest in culture and entertainment, at 32% YoY. The surge was due mainly to the impact of the pandemic on these activities a year earlier.

Tourist numbers make their mark

As is mentioned above, foreign tourists’ card turnover in Iceland increased by 45% in real terms, mainly because of far larger visitor numbers in March 2023 than in the same month of 2022. According to data from the Icelandic Tourist Board, some 161,000 foreign nationals departed Iceland in March 2023, or 59% more than in the same period in 2022.

It should come as no surprise that the bulk of foreign card turnover, about a fourth, is due to accommodation expenses. Furthermore, YoY growth is greatest in the accommodation sector, at nearly 100%. All foreign turnover items grew between years, led by gifts and souvenirs (80%), supermarkets and grocery stores (69%), and restaurant services (58%). Presumably, YoY growth will ease in coming months, as the effects of the pandemic subsided over the course of 2022. On the other hand, growth can be expected to gain momentum, as the outlook is for a considerably larger number of tourist visits to Iceland in 2023 than in 2022.

Will private consumption growth ease?

Private consumption grew by 8.7% in 2022, the fastest growth rate seen since 2005. It was particularly strong in H1 but then eased steadily in H2. But it picked up again in early 2023, presumably because of the newly signed wage agreements, which provided wage-earners with retroactive pay rises. These effects will probably subside over time, however, and private consumption growth will ease accordingly. That said, private consumption will most likely keep growing over the course of the year. Large groups of public sector employees have recently negotiated handsome pay increases, and most households are well positioned and hold sizeable accumulated savings. In our macroeconomic forecast from February, we projected that private consumption would grow by 2.5% in 2023, as higher interest rates are set to affect consumers’ saving and consumption to an increasing degree.


Bergthora Baldursdottir