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Households shift consumption down to first gear

Icelanders’ payment card turnover shrank in real terms in September, for the sixth month in a row. At the same time, domestic turnover with foreign cards increased in line with the rise in tourist numbers, and card-related FX inflows approached perhaps ISK 10bn during the month. Developments in card turnover give a clear indication of a turnaround in Icelanders’ private consumption habits after the strong growth seen in the recent term.

Payment card turnover using non-commercial domestic payment cards totalled just over ISK 98bn in September, according to figures recently published by the Central Bank (CBI). In nominal terms, this represented a 5% increase between years, but in price- and exchange rate-adjusted terms the situation is quite different. By this metric, Icelandic households’ card turnover shrank 1.6% YoY in September, both within Iceland (-1.3%) and overseas (-4.2%), as calculated at constant prices and exchange rates. By this measure, domestic turnover has contracted for six months running, and foreign turnover has shrunk for four months in a row.

Card turnover brings strong FX inflows

The contraction in Icelandic households’ card turnover abroad goes hand-in-hand with the reversal in Icelanders’ overseas travel. Icelandic Tourist Board data on Icelandic nationals’ departures via Keflavík Airport show that after a surge starting with the relaxation of pandemic-era travel restrictions and lasting through Q1/2023, Icelanders’ overseas travel has been contracting year-on-year ever since April, apart from an uptick in July. For example, just under 47,000 Icelanders travelled abroad via Keflavík Airport in September, a fifth fewer than in the same month of 2022. Foreign use of Icelandic payment cards has shrunk proportionally less than the number of Icelanders travelling abroad has, and most likely for two reasons: on the one hand, Icelanders have stepped up their online shopping between years, and on the other, they probably spent more while abroad this autumn than they did a year ago.

At the same time, turnover using foreign cards at Icelandic merchants’ and service providers’ points of sale has developed broadly in line with the YoY rise in tourist visits to Iceland. In September, use of foreign cards in Iceland grew by roughly a fifth between years, to just over ISK 33bn, and the associated FX inflows exceeded outflows due to foreign use of Icelandic cards by ISK 9.5bn. This balance, which we generally refer to as the payment card turnover balance, has been positive each month since May; i.e., turnover with foreign cards in Iceland has exceeded turnover with Icelandic cards abroad. In Q3/2023, the card turnover balance was positive by nearly ISK 45bn, up from just under ISK 32bn in Q3/2022.

Has private consumption shifted down to first gear?

Payment card turnover is one of the statistics that give perhaps the clearest idea of how private consumption is developing at any given time, as Icelandic households use payment cards for the vast majority of their consumption spending. As the chart indicates, there tends to be a reliable correlation between, on the one hand, year-on-year card turnover at constant prices and exchange rates, and on the other, private consumption. There are exceptions to this rule of thumb, however, as can be seen in data for Q2, which showed a 5.5% contraction in payment card turnover, whereas preliminary figures from Statistics Iceland showed an increase of 0.5% in private consumption.

In Q3, card turnover contracted in real terms by 2.5%, suggesting that households tightened their belts between years, in response to soaring inflation and high interest rates. On the other hand, real wages rose during the quarter, and consumer expectations about the economy and the labour market improved relative to the quarter beforehand. Presumably, private consumption has been somewhat more buoyant than card turnover figures indicate, although it could also be that households are saving more than before. Finally, it is worth noting that real wages do not take into account the impact of rising interest rates on wage-earners’ disposable income.

In any event, most indicators imply that at best, private consumption increased modestly during the quarter, and may perhaps have contracted somewhat. This would represent a turnaround after the private consumption spree dating from spring 2021 until the end of last winter. In our recent macroeconomic forecast, we projected that the YoY downturn in GDP growth would be due in large part to weaker private consumption growth. The figures above support our forecast, and we expect developments to continue broadly along the same lines in the quarters to come.


Jón Bjarki Bentsson

Chief economist