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Hordes of tourists and a smaller goods account deficit in September

Last month saw the second-largest number of September tourist arrivals on record, coupled with a continued decline in the goods account deficit. The outlook is for a sizeable trade surplus this September – and indeed, in Q3 as a whole. For the full year, the outlook is for a small current account surplus.

Some 222,000 tourists departed Iceland via Keflavík Airport in September, according to newly published figures from the Icelandic Tourist Board – slightly more than we had forecast and an increase of one-fourth year-on-year. Only in 2018 have September tourist numbers been higher. As before, Americans represented the largest nationality group, at 30% of the total, followed by visitors from Germany (6.9%), Poland (4.8%), Canada (4.6%), and the UK (4.6%). Canadians have accounted for a growing share of visitors to Iceland in recent months, with more than 10,000 arrivals in August and again in September.

In 2023 to date, some 1.7 million foreign nationals have travelled through Keflavík Airport, an increase of over a third YoY. In our macroeconomic forecast, published last month, we projected that this year’s total would exceed 2.2 million, and most indicators suggest that this forecast will be borne out.

Good account deficit on the decline

In September, the balance on goods showed a deficit of ISK 23.7bn, according to recently published preliminary figures from Statistics Iceland (SI). It was the second month in a row to see a marked decline in the deficit on goods trade, which is now at its smallest since this past March. The September reduction is due to relatively modest goods imports and strong goods exports in comparison with the months beforehand.

Goods were exported for nearly ISK 84bn in September, the largest total in ISK terms in half a year. Not least among the drivers of the surge were robust marine product exports and a jump in exports of manufactured goods other than aluminium. Marine product prices have developed rather favourably in the recent past, whereas aluminium prices have receded from the level seen in the wake of Russia’s invasion of Ukraine.

Over the same period, goods imports were broadly unchanged from recent months, totalling just under ISK 108bn in September. However, imports were down sharply relative to the September 2022 total of ISK 134bn, owing mainly to a strong YoY contraction in imports of commodities (-24%) and fuel (-49%). As the chart indicates, October 2022 was also unusual on the imports side, and it is quite possible that next month’s import figures will feature a similar YoY contraction.

Growth in both imports and exports of goods has lost momentum in recent quarters, after accelerating strongly in 2021 and 2022. At constant exchange rates and in terms of the trade-weighted exchange rate index published by the Central Bank (CBI), exports have shrunk virtually uninterrupted since the turn of the year, while import growth has been more resilient overall. The contraction in exports is due in part to lower aluminium prices and a reduction in marine product export volumes. On the imports side, the turnaround largely reflects weaker growth in demand for imported investment and consumer goods, plus the marked decline in fuel and commodity prices earlier this year.

A trade surplus likely in Q3

According to goods trade figures for Q3, which are now available, the goods account balance was in deficit by ISK 106bn. Figures on services trade in Q3 have yet to be published, however, and the available data extend only through June. However, using indicators of tourist numbers, payment card turnover, and other variables, it is possible to sketch out a rough estimate of developments in services trade during the quarter. Presumably, the data will show handsome tourism-generated revenues, in line with the substantial YoY increase in visitor numbers. We estimate the surplus on services trade at around ISK 137bn for the period, although this projection is highly uncertain.

On the whole, we estimate that the Q3 trade surplus lay in the neighbourhood of ISK 30bn. This is smaller than the Q3/2022 surplus of ISK 48bn but a clear indication that trade-related inflows were sizeable during the quarter.

The ISK exchange rate firmed up early in Q3, only to sag in September, but the available data and our estimates suggest strongly that the depreciation since late August was not caused by an unfavourable trade balance.

The outlook is for reasonably well balanced external trade through the year-end, with a goods account deficit and a services account surplus engaged once again in a tug-of-war like that we have seen in the recent term. In September, we forecast a marginal current account surplus in 2023 as a whole, as H1 showed a deficit of ISK 4bn. The developments described above seem to support that forecast.


Jón Bjarki Bentsson

Chief economist