Import growth fuels larger goods account deficit

The increased deficit on goods trade year-to-date is due primarily to import growth. Imports of transport equipment and other consumer and investment goods have surged this far in 2021. The outlook is for exports of goods and services to outweigh import growth in coming quarters.

Iceland recorded a goods account deficit of ISK 28.6bn in November, according to preliminary figures from Statistics Iceland (SI). This is the third-largest single-month deficit on goods trade thus far in 2021, well below the June record of ISK 47.6bn. The deficit is due largely to the imports side of the equation, with goods imports totalling ISK 100.8bn during the month, the second-largest ISK total ever recorded. Goods exports amounted to ISK 72.3bn in November, comfortably above the average of ISK 61bn for the first ten months of the year.

Domestic demand gains steam once again

Growing domestic demand has made its mark on goods imports in 2021. In the first eleven months of the year, goods were imported for a total of ISK 901bn, an increase of nearly 28% year-on-year in ISK terms. But the exchange rate is not the culprit, as the Icelandic króna was an average of 2.5% stronger during this period than in 2020.

SI recently released a breakdown of goods imports and exports by goods category, including developments in volumes and prices, over the first ten months of 2021. The figures show clearly how large a share of import growth stems from increased volume. On the whole, imported goods values were up by a fifth YoY over this ten-month period. Growth was significant in all key goods categories, but imports of investment goods stood out from the rest.

For example, imports of aircraft were up YoY by a factor of six and imports of ships by a factor of three. In all, imports of investment goods increased by 47% in volume terms over the period. Furthermore, imports of motor vehicles for private use grew by 32% YoY, while imports of other consumer goods were up 13.5% in volume terms. The prices of these goods have held broadly unchanged YoY, however, as the appreciation of the ISK has offset price hikes measured in foreign currency.

Operational inputs and commodities tell a different tale, though, with prices rising 7.2% in ISK terms, owing to surging prices in foreign fuel and commodity markets during the year.

Divergent developments in key goods exports

The situation looks quite different on the exports side. In the first eleven months of the year, goods were exported for a total of ISK 683bn, an increase of nearly 22% year-on-year in ISK terms. According to the aforementioned SI breakdown for the first ten months of 2021, the volume of exported goods increased by 8.8% YoY, while exported goods prices rose 10% in ISK terms.

Developments have diverged widely in two key goods export categories. Energy-intensive export volumes grew only by a scant 2% during the period, while prices were up by an average of over 30% YoY. To a large degree, this reflects the surge in the price of aluminium and other industrial metals in recent quarters. To give an example, global aluminium prices were up 46% YoY, on average, during this ten-month period.

The opposite holds true for exports of marine products and aquaculture products, which have soared in volume, aquaculture products in particular. According to SI’s figures, aquaculture export volumes rose nearly 40% over the aforementioned period, as opposed to 10% for marine products. Nevertheless, the price per tonne was lower for these exports, and they increased less in value than in volume, mainly because of a stronger ISK, price movements abroad, and changes in the composition of export products.

Deficit expected for 2021, but a surplus is in the cards

The deficit on combined goods and services trade came to just over ISK 50bn for the first three quarters of 2021. The larger goods account deficit relative to last year is due mainly to the recovery of domestic demand, as is mentioned above; however, it also reflects stronger imports of tourism-related inputs. This is offset by the significant rise in tourism-generated revenues since the beginning of summer, which was the main reason the surplus on services trade outweighed the deficit on goods trade in Q3.

In our opinion, the trade balance for Q4 is highly uncertain. There will be a sizeable deficit on goods trade during the quarter, as October and November combined have already delivered a deficit of over ISK 41bn. Furthermore, the outlook is for tourism revenues to be considerably weaker in Q4 than in Q3. But Q4 might have an ace up its sleeve in the form of intellectual property exports, if 2021 proves similar to the years preceding it. Revenues from intellectual property exports totalled ISK 37bn in Q4/2020 and nearly ISK 29bn in Q4/2019, and in both years the total for Q4 exceeded the total for the first three quarters by a healthy margin. That said, these figures probably represent some sort of reconciliation of accounts and need not reflect actual intrayear flows.

At all events, Iceland’s external trade outlook is sunny further ahead. Rapid growth in tourism-generated revenues, growth in other services exports, a bountiful capelin season, and further growth in exports of other marine products will probably outweigh the expected increase in imports, making it likely that Iceland’s current account balance will turn positive again in 2022.


Jón Bjarki Bentsson

Chief economist