Households tighten their belts during the holiday season

Households’ payment card turnover has continued to shrink, according to newly published figures for December, indicating a contraction in private consumption in Q4/2023. Demand turned a corner in the domestic economy in H2/2023, and the Central Bank’s policy rate hikes are probably at or near an end.

In nominal terms, turnover with domestic payment cards increased in December by a scant 4% year-on-year, to just under ISK 130bn. In price- and exchange rate-adjusted terms, households’ card turnover contracted by 1.8% YoY in December. Card turnover has now shrunk in real terms for nine months running.

Households’ card use in Iceland contracted by nearly 3% in real terms in December, yet in a noteworthy turn, real card turnover abroad grew by 3% over the same period. Until December, overseas card use had contracted for six consecutive months. Despite the increase in foreign turnover, fewer Icelanders travelled abroad in December than in the same month of 2022. In all, 36,000 Icelanders departed the country via Keflavík Airport in December, a 15% decline from the December 2022 total of 43,000. The rise in overseas card turnover must therefore be due to online shopping with foreign merchants. Icelandic households have grown quite accustomed to e-commerce, and it may well be that they bought more holiday gifts online than in previous years.

Card turnover data suggest a continued downturn in private consumption

Payment card turnover figures for the entire year 2023 are now available. In real terms, turnover contracted by just under 2% relative to 2022, showing a marked change over the past two years. In 2022, for instance, it grew by over 9% YoY, in line with rapid growth in private consumption. Naturally, this slowdown accords with the cooling of the economy at present. Card turnover is a reliable indicator of developments in private consumption, which contracted in Q3/2023 for the first time since 2020. The outlook is for a contraction in Q4 as well.

As we see it, the Central Bank’s (CBI) interest rate hikes are cooling down the economy effectively, at least on the demand side. In addition to private consumption are a range of indicators suggesting that investment stagnated or declined in H2/2023. Presumably, the CBI’s Monetary Policy Committee will breathe easier now that Icelanders are cutting back on spending and stepping up their saving. All else being equal, we assume that the CBI’s monetary tightening phase is now coming to a close, if it has not already ended.


Bergthora Baldursdottir