According to newly published card turnover data from the Central Bank (CBI), Icelanders’ payment card turnover contracted in real terms by 5% year-on-year in November. But there was a vast difference between turnover within Iceland and turnover abroad. Card turnover within the country totalled ISK 71.5bn, a real increase of over 6% YoY, while overseas turnover contracted by nearly half, to a total of ISK 10.0bn.
Domestic card turnover still on the rise despite the Corona Crisis
Payment card turnover figures for November indicate that consumers still have a considerable appetite for consumption, Corona Crisis and associated tribulations notwithstanding. Although card turnover abroad has shrivelled up since the pandemic struck, the deficit on the card turnover balance has never been as large as it was last month. Private consumption is likely to contract somewhat in Q4/2020, but as in the recent past, the downturn will probably be limited to spending overseas.
There is little doubt that seasonal sales on Singles Day and Black Friday contributed to the domestic surge between years. Sales like these have been quite a hit in Iceland in recent years, and with the COVID-induced bans on gatherings, online shoppers have been eager to take advantage of such special offers. For example, the director of Iceland’s Federation of Trade and Services (SVÞ) was quoted on mbl.is as saying that e-commerce sales had surged to an all-time high in November.
Record cross-border card turnover deficit
The share of foreign card use in Icelanders’ total payment card turnover has fallen steeply since the Corona Crisis struck. In November 2020, foreign transactions accounted for just over 12%, down from an average of nearly 18% in 2019. Presumably, the decline would have been even more pronounced if Icelanders had not stepped up their shopping with foreign online merchants. In this context, it is worth noting that, according to Icelandic Tourist Board figures, Icelanders took trips abroad just under 2,000 times last month, as opposed to more than 45,000 in November 2019. Although the weaker ISK probably plays a part in keeping the contraction in turnover smaller than it would be otherwise, we think the main reason must lie in a surge in orders from Amazon, AliExpress, ASOS, and others. In an interview with the Icelandic National Broadcasting Service (RÚV), DHL Iceland’s sales and marketing director noted that the number of packages shipped to Iceland via DHL had more than doubled year-on-year in recent weeks.
To be sure, the stability of domestic turnover in the face of an economic recession and pandemic-related public health measures is a sign of strength. On average, domestic turnover increased in price-adjusted terms by 2.7% in the first 11 months of 2020, whereas overseas turnover shrank by 45% in real terms over the same period. But the fact remains that when revenues from foreign tourists’ spending while in Iceland are at rock-bottom, as they have been since April, overseas payment card turnover generates significant foreign currency outflows. With the exception of July, there has been a sustained deficit on the payment card turnover balance since March. The deficit was greatest in November, when net outflows due to card transactions came to ISK 8.3bn, the largest total since the turn of the century. Presumably, then, Icelanders are not limiting their holiday shopping to domestic e-commerce providers, despite the surge in online shopping with Icelandic e-merchants.
Pandemic-driven private consumption cycle
There is a strong correlation between card turnover and the incidence of COVID-19 cases, and it gives an indication of how much private consumption fluctuates in tandem with the pandemic and the measures designed to combat it. As the chart shows, the YoY contraction in card turnover peaks around the time when the incidence of infection is greatest. Given the decline in COVID case numbers in the past few weeks, it could be that the contraction in card turnover in the final stretch of 2020 will turn out relatively moderate, even though pandemic response measures will inevitably make their mark on holiday celebrations this year.
Private consumption set to contract in 2020 but grow in 2021
Over the first nine months of 2020, private consumption shrank in real terms by 3.5% YoY. Payment card turnover is the indicator that gives perhaps the clearest idea of where private consumption is headed. As the chart shows, the correlation between the two has been quite strong in the recent term, suggesting that private consumption will probably develop broadly in line with card turnover in Q4/2020.
At present, consumption is supported by rising real wages among those who have remained fully employed this year. The same is true of most households’ asset position, which was generally strong before the onset of the Corona Crisis and, in most cases, has probably suffered little damage since. On the other hand, a rapidly growing number of households are facing or expecting severe headwinds as a result of job losses and/or income losses due to the pandemic. Unemployment measured 10.6% in November, and the Directorate of Labour expects it to rise still further in December.
As a consequence, private consumption could well turn out considerably weaker in Q4 than it was a year ago. In our forecast, published in late September, we projected that private consumption would contract by 3.3% in 2020 as a whole. It appears as though that forecast will prove quite accurate. On the other hand, the outlook is still for private consumption to rebound over the course of 2021, as the pandemic subsides.