The past few months have seen a contraction in price- and exchange rate-adjusted payment card turnover after hefty growth in recent years, in a clear sign that Icelandic households are clutching their wallets tighter in response to mounting economic uncertainty. According to Central Bank (CBI) card turnover figures for January and February, the outlook is for a sharper contraction in Q1/2019 than in the last quarter of 2018. Private consumption growth will probably be significantly weaker this year than last year.
Households hitting the consumption brakes
The past few months have seen a contraction in price- and exchange rate-adjusted payment card turnover after hefty growth in recent years, in a clear sign that Icelandic households are clutching their wallets tighter in response to mounting economic uncertainty.
The CBI figures show that card turnover totalled ISK 67.1bn in February, an increase of 7.3% year-on-year. But when the figures are adjusted for price and exchange rate movements, a different picture emerges, with domestic and foreign card turnover up by only 1.3% YoY.
Although this is still a positive YOY growth rate, card turnover contracted markedly during the months beforehand. Until mid-2018, real card turnover was quite robust, at 8.6% YoY in H1/2018 and an average of 11% YoY in 2017 as a whole. Since then, the pace of growth has slowed markedly, and Q4/2018 was the first quarter since early 2013 to show a YoY contraction in price- and exchange rate-adjusted turnover. The figures for January and February 2019 indicate that an even larger contraction can be expected in Q1.
Private consumption growth softens
Given these developments in card turnover, plus households’ downbeat sentiment and a slowdown in real wage growth, we think it inevitable that the recent boom in private consumption will lose steam this year. In fact, we expect private consumption growth to fall to its weakest since 2013. Two of the main determinants of developments in consumption are real wage growth and population growth. Newly published wage index and real wage figures from Statistics Iceland (SI) indicate that real wage growth in Q1/2019 will be the slowest since 2013. In January and February, for instance, it averaged only 2.5% YoY.
Furthermore, household sentiment according to the Gallup Consumer Confidence Index is relatively bleak, although it has brightened slightly since late 2018. And finally, population growth has eased from its 2017 peak. SI now projects year-2019 population growth at just under 2%, down from 3.0% in 2017.
In our macroeconomic forecast from January, we projected private consumption growth for this year at 2.7%, and the developments described above appear to support that forecast.