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Consumer confidence hits three-year high

The Gallup Consumer Confidence Index rose to a three-year high in March, fuelled by expectations of better times six months ahead. Icelanders are planning home and car purchases is large numbers but are less inclined to travel abroad at the moment.

Overall sentiment among Icelandic households has improved markedly in the recent term, according to the most recent Gallup Consumer Confidence Index (CCI) measurements. The index measured 114.4 points in March, its highest in three years. Consumer sentiment has bounced back with a will since the arrival of COVID-19 vaccines began to make the news in Q4/2020. In October, for instance, the CCI was slogging along at 47.2 points, indicating widespread pessimism about economic and labour market developments and prospects. An index value of 100 indicates parity between optimists and pessimists, so this most recent measurement suggests that upbeat sentiment has gained the upper hand.

As the chart indicates, the past few months’ rise in the CCI is due largely to expectations of better times ahead. A majority of respondents still consider the current situation poor, but an overwhelming majority expect things to be better six months from now. The recent setbacks in the COVID-19 pandemic and the slower-than-expected vaccine roll-out appear not to have dampened this enthusiasm to any significant degree as yet.

Home and car purchases in the offing for many

Gallup publishes its big-ticket index of planned major purchases on a quarterly basis, and it released the most recent measurement together with the March CCI value. Interest in car purchases has grown, as can be seen in the vehicle purchase component, which rose from 19.5 points to 23.7 between surveys. In all, nearly 14% of respondents considered it likely that they would buy a motor vehicle in the near future, which should comfort an undernourished automotive sector somewhat. Actually, individuals bought 7% more vehicles in 2020 than in 2019, but new vehicle registrations contracted by more than a fifth overall, primarily because of a dip in purchases by car rental agencies. The Gallup measurement indicates, however, that the general public are still contemplating car purchases, and the rental market will probably right itself over time, once tourists begin to visit Iceland in greater numbers.

On the other hand, the survey indicates that Icelanders are not planning much international travel in the near future. The index component for foreign travel declined somewhat in March. In all, just under 39% of respondents are considering going overseas in the near future, down from an average of 75% before the Corona Crisis struck. So there is much ground to cover before Icelanders’ famed wanderlust returns to its previous level, if the Gallup survey is any indication.

But as before, a number of respondents are considering buying a home, according to Gallup. The index component for planned house purchases rose in March, and now more than 5% of respondents consider it more likely than not that they will buy a home in the near future. The home purchase sub-index has held relatively stable in the recent past, despite the turmoil in the economy. This accords well with developments in the housing market, where turnover has been buoyant and prices have risen steadily, Corona Crisis or no, and the newest Gallup measurements give no indication that any change is in the offing.

Private consumption set to rise this year

The CCI gives a reliable indication of Icelanders’ consumption patterns, as appetite for spending grows when consumers are optimistic, while prudence and caution carry the day when they are worried. Most households’ financial position remains sound despite the Corona Crisis, as those who have kept their jobs have seen their real wages rise in the past year, and opportunities for spending on luxuries such as overseas travel have been limited.

Private consumption contracted by 3.3% in 2020, after an uninterrupted rise lasting nine years. Nevertheless, the uptick in the CCI reinforces our opinion that consumption will rebound this year. In our macroeconomic forecast from January, we projected private consumption growth at nearly 2% in 2021, and we see no reason to modify that assumption.


Jón Bjarki Bentsson

Chief economist