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Goods and services trade weaker than expected in H1

Iceland’s trade balance showed a record deficit in Q2, despite a surplus of ISK 25bn on the services account. The outlook for goods and services trade in 2021 has deteriorated somewhat, but it will improve rapidly once tourism recovers.

Despite the improvement in services trade, the combined balance on goods and services showed the largest second-quarter deficit since before the 2008 financial crisis. The record deficit was due to the goods account balance, which was strongly negative during the quarter. The deficit on combined goods and services trade came to nearly ISK 31bn in Q2. The services account returned to positive territory after a deficit at the turn of the year, with a surplus of over ISK 25bn in Q2. The balance on goods, however, was negative by nearly ISK 56bn, the largest deficit in 15 years. The gaping goods account deficit is due mainly to strong imports, as we discussed in Icelandic Market Daily earlier this summer. Growing imports go hand-in-hand with increased economic activity as the pandemic wanes, so in a sense it represents good news, although it inevitably brings with it a larger goods account deficit.

Pandemic gouges exports

Tourism-generated export revenues have been the backbone of the surplus on services trade in recent years, but the COVID-19 pandemic has well and truly upset that apple cart. On the other hand, expenditures due to Icelanders’ travels abroad all but evaporated during the pandemic. When tourism gets a little wind in its sails, however, it shows very quickly in the numbers. For instance, export revenues due to passenger transport and travel came to just over ISK 30bn in Q2, with the bulk of that amount presumably falling in June. Over that same period, expenditures due to Icelanders’ overseas travel came to just over ISK 16bn, leaving a surplus of ISK 14bn on travel-related services trade.

Apart from tourism, the services account surplus is due mainly to hefty export revenues from intellectual property use . According to Statistics Iceland (SI), these revenues are generated in the pharmaceuticals industry, which has often contributed handsomely to Iceland’s balance on services.

Goods exports picking up speed again

As could be expected, the composition of export revenues changed dramatically with the arrival of COVID-19. Fortunately, the disruptions to goods exports proved to be temporary, for the most part, and exports have been much smoother in recent quarters. Aluminium exports have rallied strongly in recent months, buoyed by a strong rise in prices since the turn of the year. Marine product prices were under pressure early on but have recovered somewhat since.

Bleaker outlook for 2021, but recovery lies ahead

In H1/2021, Iceland’s balance on goods and services trade was negative by ISK 59bn. This is a considerably weaker outcome than we projected for the year as a whole (surplus of ISK 9bn) in our most recent macroeconomic forecast, issued in May. If tourism continues to gain strength, the services account surplus will presumably be much larger in H2 than in H1. But there is growing reason to expect the trade balance to be negative this year, as it was in 2020.

Next week, when the Central Bank (CBI) publishes its current account balance statistics for Q2, data on primary and secondary income will be added to the numbers above. It will be interesting to see whether the balance on income offsets the trade deficit, as it has in recent quarters – ultimately pushing the current account into surplus territory for 2020 as a whole. Finally, it is good to remember that although it is uncertain whether the trade balance will be in the black this year, the outlook is for a sizeable surplus in 2022, when tourism regains momentum.


Jón Bjarki Bentsson

Chief economist