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Jump in private consumption greets the new year

Payment card turnover surged by 10% in real terms in January, owing in large part to growth in spending on domestic services. Icelanders’ consumption abroad has made its mark on the payment card turnover balance recently, although the wave of tourist arrivals has provided some counterweight. The outlook is for a growing surplus on cross-border payment card transactions in the coming term.

Icelanders’ consumption at home soared in January, according to recent payment card turnover data. According to the Central Bank (CBI), transactions using Icelandic payment cards totalled nearly ISK 101bn in January, an increase of ISK 19bn year-on-year. In real terms – i.e., adjusted for price and exchange rate movements – the increase came to 9.8% YoY, the fastest real growth rate since August 2022. We think this wintertime surge in consumption is due to the wage agreements recently negotiated for a large share of the private sector, which gave wage-earners a double-barrelled shot in the arm in the form of direct rise in monthly pay and a clause making the new contracts retroactive to last November.

In a departure from the recent trend, a fair share of January’s increase in real card turnover took place within Iceland. For instance, card-based transactions with domestic retailers and service providers increased in real terms by 7.7% YoY, while over the same period, card turnover abroad rose 19% in real terms. Although the increase abroad was proportionally larger than that in Iceland, it represents a much more modest growth rate than has been typical in recent quarters. On average, overseas card use accounts for one-fifth of total turnover, as opposed to four-fifths for card use within Iceland.

Domestic services boom

According to a recent news release from the Icelandic Centre for Retail Studies (RSV), card turnover growth within Iceland was far stronger (in ISK terms) for services (34%) than for retail/wholesale trade (8.8%). It should also be borne in mind that the pandemic-related public health measures were tightened significantly at the beginning of 2022, limiting Icelanders’ ability to seek out a range of services, including restaurants, theatres, and so forth. The news release from RSV specifies that year-on-year growth was particularly strong in these areas.

But as the numbers above indicate, even though consumption within Iceland accounted for a noticeable share of total card turnover in January, it cannot be said that Icelanders were sitting on their hands outside the country. According to recent figures from the Icelandic Tourist Board, Icelandic nationals’ departures from Keflavík Airport for points abroad totalled 41,500 during the month, an all-time January record. This, together with Icelanders’ growing patronage of foreign online merchants, explains the bulk of overseas card turnover.

The Tourist Board press release also states that around 121,000 foreign nationals departed Iceland via Keflavík Airport in January, about the same as in January 2020 and about 80% of the January 2018 total. In other words, for every Icelander who travelled abroad in January, approximately three foreign tourists visited Iceland.

On the other hand, Icelanders’ card use abroad and via online merchants exceeded card use by foreign nationals in Iceland, giving a payment card turnover balance of ISK -4.4bn during the month. The card turnover balance has actually been negative since last October, but during tourism’s pre-pandemic heyday it was virtually always positive year-round.

Growing card turnover surplus in the offing

The payment card turnover balance alone does not give a comprehensive view of the balance between revenues and expenditures stemming from cross-border travel, however. For instance, domestic airlines have significant tourism-generated revenues from transactions routed through foreign payment service providers, and tourists can also exchange major currencies for ISK in domestic banks without using payment cards to do so.

SI’s services account figures therefore give a more complete view off cross-border revenues and expenditures stemming from travel. The services account has been consistently in surplus since 2009, apart from a few isolated quarters during the worst of the pandemic.

With the post-pandemic rebound in tourism starting in spring 2022, this type of services trade has generated hefty surpluses, as it did before COVID. For instance, international passenger transit and other travel-related items generated net revenues in the amount of ISK 194bn in the first three quarters of 2022.

And as far as we can see, even though Icelanders’ zest for travel soared to historical highs in Q4/2022, travel-related services delivered a surplus during that quarter, too. SI is scheduled to publish its year-2022 figures this coming Friday, but according to our preliminary estimates, the travel-related services surplus will be in the neighbourhood of ISK 65bn for Q4 and roughly ISK 260bn for the year as a whole. That surplus will be most welcome, too, given last year’s ISK 323bn goods account deficit.

In our most recent macroeconomic forecast, we projected that the current account balance will improve year-on-year in 2023 and be close to zero in 2024, after sizeable deficits in recent quarters. Continued strong growth in tourism is a prerequisite for this, as is more temperate growth in Icelanders’ overseas consumption. If this materialises, the payment card turnover balance will show growing surpluses in the coming term.


Jón Bjarki Bentsson

Chief economist