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Corona Crisis colours card turnover

Payment card turnover data show that the raging COVID-19 pandemic strongly affects private consumption. This year, the slump in private consumption is concentrated mainly in spending overseas. The outlook is for a sizeable contraction this year, although consumption could pick up swiftly in 2021.

The contraction in individuals’ payment card use in October was the largest in real terms since this April, the peak of the first wave of the pandemic. October turnover figures were affected by Increasingly tighter public health measures during the month. Total turnover using domestic-issued cards totalled ISK 78.1bn in October, a contraction of 11.6% year-on-year in price- and exchange rate-adjusted terms. Exchange rate-adjusted card turnover outside Iceland plummeted, as it has in the recent past, contracting by more than half in October. But domestic turnover also declined between years, for the first time since April.

Consumption patterns align with the path of the pandemic

It is interesting to compare developments in card turnover with the path of the COVID-19 pandemic, as the latter has been a major direct and indirect determinant of economic developments in Iceland and around the world. As can be seen in the chart below, there is a strong relationship between the incidence of new infections and payment card turnover. After a steep drop in household consumption at the height of the first wave of the pandemic, card turnover picked up strongly as soon as case numbers started to fall and public health measures were relaxed. However, when the second wave hit and border restrictions were tightened, turnover slowed markedly once again. Presumably, the third wave, which peaked in the middle of October, and the associated public health measures slowed household consumption even further during the month.

Of course, there are other factors apart from the pandemic itself that are affecting card turnover at present. The impact of the pandemic on the economy and the job market is coming increasingly to the fore. Unemployment has risen inexorably, hitting 9.0% in October, and real wage growth has lost pace, owing to slower wage increases and rising inflation. Moreover, household expectations about developments in coming quarters have declined, and presumably, many households will prefer to hold off on consumption spending until the outlook brightens again.

Consumption shifts to the domestic market in 2020

Fortunately, goods and services from abroad have suffered much more from the contraction in private consumption than domestic goods and services have. As a result, the effect on the domestic retail/wholesale trade, services, and manufacturing sectors that rely on Icelanders’ consumption has been much milder year-to-date than the overall contraction in consumption would tend to suggest. In H1, for instance, payment card turnover abroad contracted by nearly 40% in real terms, while real turnover within Iceland was broadly flat year-on-year. Private consumption shrank by 4% in H1, according to figures from Statistics Iceland (SI).

Card turnover figures for July-October indicate a similar pattern. In the past four months, card use outside Iceland shrank by an average of 53% relative to the same period in 2019, while turnover in the home market grew by nearly 5% in spite of the above-mentioned contraction in October. This trend can be expected to continue affecting card use figures. Christmas shopping trips to foreign cities will likely be few and far between this year, and news reports of record sales in domestic online stores on 11 November, “Singles Day”, may well be a harbinger of things to come in the weeks ahead, which include Black Friday and the Advent season. On the whole, domestic retailers and wholesalers will probably sail in relatively calm waters in the near term, despite the impact of the pandemic.

Consumption contracts markedly in 2020 overall

Although the developments described above are positive in the sense that domestic trade and services are enjoying stronger-than-expected headwinds, the uptick is nowhere near enough to outweigh the virtual collapse in foreign-issued card turnover since the pandemic struck. The payment card turnover balance was more or less flat over the peak of summer, but apart from July and August, it has been strongly negative ever since March. The situation will probably not improve substantially until the pandemic recedes and consumers are once again able and willing to travel. The most recent news reports give cause for hope that this could happen sooner instead of later, however.

On the whole, card turnover figures reflect this year’s contraction in private consumption, which stems primarily from reduced spending on foreign turf. Rising unemployment and an uncertain outlook will continue to affect consumption this winter, but the most recent news about potentially effective vaccine candidates could give households’ expectations a boost. In September 2020, we projected that private consumption would contract by 3.3% this year. Given the developments over the past few months, we think that forecast was probably on the optimistic side. However, our forecast of 1.7% private consumption growth in 2021 could turn out rather modest, particularly if the pandemic succumbs to vaccination and other countervailing measures sooner than previously expected.


Jón Bjarki Bentsson

Chief economist