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Households hit the brakes on consumption

Icelanders’ payment card turnover shrank in real terms by 6% year-on-year in May, the biggest contraction since the beginning of 2021. May was also the first month since September 2022 to see net FX inflows from cross-border payment card use. There are signs that households are furling their sails these days and that private consumption will grow far less this year than in 2022.

According to new payment card data from the Central Bank (CBI), total turnover using Icelandic payment cards amounted to ISK 118.6bn in May, an increase of nearly 5% YoY in nominal terms. But quite a different scenario emerges when the turnover figures are adjusted for price and exchange rate movements. The adjusted data for the month show that card turnover shrank in real terms by over 6%, the strongest contraction since January 2021, in the midst of the pandemic. May was the second month in a row to see a YoY downturn, as real card turnover declined by just over 4% in April. This represents a distinct turnaround relative to previous quarters. Real card turnover growth measured over 6% in Q1/2023, and in 2022 it averaged nearly 10%.

As the chart shows, the YoY contraction stems almost entirely from reduced card use at domestic merchants and service providers, as domestic turnover with Icelandic cards fell by nearly 8% YoY in May, while turnover abroad contracted by only 0.3% during the month.

Payment card turnover balance back into positive territory

Total turnover from use of foreign payment cards in Iceland came to ISK 26.9bn in May, more than in any month since September 2022 and an increase of around one-third relative to May 2022. Moreover, May was the first month since last September to see foreign card use in Iceland exceed domestic card use abroad (which includes Icelanders’ spending while travelling and shopping with foreign online merchants). Net cross-border card turnover flows were positive by ISK 644m, as compared with a deficit of nearly ISK 3bn in May 2022.

The outlook is for sizeable net FX inflows from card transactions in coming months. As the chart shows, in recent years, net card turnover flows have nearly always been positive from June through September, apart from 2020, the first year of the pandemic. Indicators pertaining to the forthcoming peak tourist season and probable developments in Icelanders’ private consumption abroad suggest that the summer tourist season will be a bountiful one in this respect. On the other hand, we can expect a fairly hefty goods account deficit, although it will probably be smaller than the gaping deficit from last autumn.

Private consumption growth set to be considerably weaker this year than in 2022

In our opinion, developments in card turnover give a reliable indication of a shift in Icelanders’ consumption behaviour. Households appear to be hitting the brakes pretty firmly after the spending spree in the recent term. Other indicators such as the Gallup Consumer Confidence Index lend support to this opinion. Furthermore, trends in purchasing power give cause to expect that households will have to pay closer attention to their wallets in the coming term than they did until mid-2022.

In our most recent macroeconomic forecast, we projected that YoY private consumption growth would lose considerable steam in 2023. We forecast real private consumption growth for this year at 3.2%, down from 8.7% in 2022. The figures above reinforce us in our belief that this forecast will be borne out. Developments in private consumption weigh heavily in output growth, as private consumption has generated about half of Iceland’s GDP in recent years. Weaker growth is therefore a major factor in our conclusion that YoY output growth will shrink by about half, to just over 3% in 2023. That should be welcome news for the CBI’s Monetary Policy Committee, which has repeatedly cited booming domestic demand as one of the drivers of its recent interest rate decisions.


Jón Bjarki Bentsson

Chief economist