This year’s large June deficit is due mainly to unusually weak exports in comparison with the months beforehand. Goods exports totalled ISK 46.5bn during the month, the weakest since February of this year. Marine product exports were particularly sluggish, at ISK 15.5bn, the smallest in ISK terms since December 2017. This is even more remarkable given that, in terms of the marine product price index, ISK prices of marine products rose by nearly 18% between December 2017 and May 2019. The unusual month-on-month dip is probably due in part to a shift between months, as marine product exports were unusually robust in May. The months ahead could therefore prove more favourable for the industry.

Goods imports amounted to ISK 69.3bn in June, the largest ISK total since November 2018, owing in particular to strong imports of commodities and operational inputs (ISK 22.6bn), together with a surge in investment goods imports (ISK 24.8bn) relative to the months beforehand.

Lower real exchange rate more favourable for external trade

The goods account deficit for H1 as a whole totalled ISK 41bn, about half the deficit in the same period of 2018 (ISK 83bn). But SI’s figures are strongly affected by the sale of four aircraft by WOW Air in January, bringing exports of ships and aircraft close to ISK 21bn in that month alone. Excluding ships and aircraft, the H1/2019 deficit on goods trade totalled nearly ISK 60bn.

Presumably, the H2 deficit will turn out considerably larger than that in H1, as no further aircraft sales are in the pipeline. Foreign currency flows due to goods trade will be roughly the same, however, as WOW’s aircraft sales generated only negligible flows at the time they were undertaken.

In our macroeconomic forecast from June, we projected that the deficit on goods trade would narrow somewhat year-on-year, to about ISK 155bn from ISK 178bn in 2018. As a share of GDP, this year’s deficit would then measure 5.4%, the smallest since 2016. A smaller goods account deficit helps to offset the shrinking surplus on services trade caused by the contraction in tourism. Overall, we expect the current account surplus to measure 1.5% of GDP in 2019. The falling real exchange rate lends a helping hand here, and for two main reasons: it makes Iceland a more desirable travel destination and a more viable competitor in terms of other exports, and it should somewhat discourage Icelanders from travelling abroad and buying imported goods. We expect the average real exchange rate of the ISK to be a full 9% lower in 2019 than in 2017, even though inflation has been noticeably higher in Iceland than in neighbouring countries in the recent past.