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Icelanders celebrate summer with a spending spree

Icelanders’ payment card turnover in June, the second-largest total in any month to date, was driven mainly by a year-on-year surge in overseas spending. Growing pessimism among consumers and weaker growth in purchasing power have not yet made a visible impact on their appetite for consumption. We think it likely that households will furl their financial sails later this year.

According to newly published figures from the Central Bank of Iceland (CBI), Icelanders spent over ISK 113bn with their payment cards in June, only marginally less than in May, when card use hit a historical high. In price- and exchange rate-adjusted terms, card turnover grew by 10.4% year-on-year in June. Relative to June 2019, before the pandemic struck, household consumption has grown by 19% – again, in price- and exchange rate-adjusted terms.

As in the recent past, the jump between years is due primarily to an enormous increase in spending abroad. In fact, Icelanders’ domestic card turnover shrank by 2% YoY in inflation-adjusted terms. Turnover abroad nearly doubled, however.

Icelanders keen to travel post-pandemic

Icelanders’ zest for travel has rebounded strongly after the pandemic-induced lull. According to data from the Icelandic Tourist Board, nearly 66,000 Icelandic nationals departed via Keflavík Airport in June. Only twice before have more Icelanders travelled abroad: in June 2016 and June 2018.

This appetite for travel explains some of the rapid rise in overseas spending, but as the chart indicates, there are more factors at play. Icelanders’ shopping with international online merchants has grown steadily in recent years; in fact, it accounted for a large share of foreign card turnover at the height of the pandemic, when few Icelanders ventured abroad.

Despite this surge in overseas spending, however, June was the first month since September 2021 to see payment card-related foreign exchange inflows overtake outflows. The number of tourists visiting Iceland has increased rapidly in the recent term, as we have reported recently. June was the busiest month for tourism since autumn 2019, and the next few months look set for continued strong activity in the sector. Card turnover should therefore continue to generate net FX inflows,

Sentiment darkens despite buoyant consumer spending

It is interesting to see how widely card turnover and consumer sentiment have diverged. These two variables often track one another quite closely, and the Gallup Consumer Confidence Index (CCI) generally gives a reliable indication of near-term developments in card turnover – and, by extension, private consumption. But in recent months, the two have branched off in different directions: The CCI has lost considerable ground, and payment card turnover has grown strongly. Although the possibility that consumers will keep on splurging while pessimism about the economic outlook grows stronger, we think it likelier that private consumption will align with consumer sentiment, as it did in 2018-2019. As the chart shows, card turnover continued to gain steam through much of 2018, even though consumer sentiment had started to slide. But in the end, card turnover growth gave way as well.

Presumably, consumer sentiment has been affected strongly by recent developments in inflation. Rising inflation has cut into households’ purchasing power, and the Central Bank’s (CBI) resulting interest rate hikes have pushed debt service higher – or at least reminded borrowers that the low mortgage rates they may have benefitted from in 2020-2021 will probably prove to be the exception, not the rule.

Consumption to shift into low gear after a lively H1?

Q2/2022 payment card turnover and other indicators such as motor vehicle purchases, overseas travel, etc., show clearly that private consumption grew strongly in Q2, as it did in Q1. But bleaker sentiment, weaker real wage growth, and the prospect of a tighter monetary stance will combine to curb private consumption as the year progresses. In our macroeconomic forecast from May, we projected that private consumption growth would measure 3.8% in 2022 and then ease to 2.2% in 2023. We think this forecast is still very close to the mark.


Jón Bjarki Bentsson

Chief economist