Marked slowdown in GDP growth

Q2/2023 GDP growth was driven mainly by a rapid increase in tourist visits, while in other respects, economic activity has eased markedly. Private consumption growth has slowed significantly, for instance, after having been the leading driver of output growth in recent years.

According to preliminary figures published yesterday by Statistics Iceland (SI), GDP growth measured 4.5% in Q2/2023, owing mainly to increased export revenues from this year’s surge in tourism. SI’s figures also show, however, that the economy is cooling rapidly in other respects. Another factor of importance is that we are now in a period where the comparison year is not affected by the pandemic, unlike previous quarters.

Private consumption growth subsides apace

Private consumption grew by 0.5% year-on-year in Q2/2023. This is a vast change relative to previous quarters, when private consumption was the main driver of GDP growth. Based on these figures, private consumption growth has lost considerable momentum, as can be seen clearly in indicators such as payment card turnover. It is also well to bear in mind that Iceland’s population has all but exploded recently, so it may be more useful to examine per capita private consumption data. On a per capita basis, private consumption actually shrank by 2.8% YoY in Q2.

Clearly, high inflation and rising interest rates have started to affect households’ consumption behaviour. Households appear to be hitting the brakes pretty firmly after their recent spending spree. The outlook is for a continued slowdown in private consumption growth. Indeed, private consumption is likely to contract later this year.

Tourism the mainstay of Q2 GDP growth

Exports carried most of the weight of GDP growth in Q2. Total exports increased by nearly 8% in real terms during the quarter, owing entirely to growth in services. Services exports were up 19.5% YoY, while goods exports shrank marginally, by 1%. The boom in services exports is due to the surge in tourist numbers. In H1, nearly 1 million tourists arrived in Iceland via Keflavík Airport, an increase of about 50% YoY,

and it is highly likely that services exports will keep growing in the near future. In our most recent macroeconomic forecast, we projected that tourist numbers would exceed 2.1 million this year, putting 2023 in second place in Iceland’s all-time visitor rankings. It is quite conceivable that this forecast will prove to have been on the low side and that tourist numbers will be slightly higher for the year as a whole.

Imports grew by 1% YoY in Q2, which translates to a marked slowdown in import growth relative to previous quarters. This is Iceland’s weakest import growth rate since Q1/2021. Goods imports grew by just over 2% during the quarter, while services imports contracted by 1%. This reflects more Icelanders’ muted demand for overseas travel in 2023 than in 2022. Q2 figures show that Icelanders’ foreign travel declined by over 7% relative to the same period in 2022.

Investment growth due to increased business investment

Investment grew by 1.6% between years in Q2/2023, owing entirely to growth in business investment, which increased by 7.5%. This was offset, however, by a 5.4% contraction in residential investment and a 9.0% contraction in public investment. SI points out, though, that there is some uncertainty about residential investment data, and that the contraction in public investment is due largely to reduced investment at the municipal level.

Such a strong contraction in residential investment is somewhat surprising. Give the leading role the housing market has played in inflation and economic growth recently, it is unfortunate that SI should repeatedly attach provisos to residential investment data, casting doubt on the quality of the data concerned. According to the Housing and Construction Authority, just over 2,100 new homes have been put on the market in 2023 to date. Based on the number of homes currently in the last stages of construction, another 700 could be put on the market by the end of the year. This is roughly on a par with last year’s total of just under 2,900 new homes advertised for sale.

Economy cooling

These figures from SI show clearly that the economy is finally cooling down after its recent growth spurt. The growth that has been seen recently is due mainly to a buoyant tourism sector – a trend that is likely to continue in the year future. GDP growth measured 5.8% in H1/2023. SI released revised GDP figures for recent years alongside this morning’s publication. These revisions show that growth was considerably stronger in 2022, or 7.2% instead of the previously anticipated 6.4%, and that the change was due mainly to more robust growth in exports, investment, and public investment than previous figures had indicated.

In our macroeconomic forecast from May, we projected year-2023 GDP growth at right around 3%. The data described above suggest that this forecast is still valid. We hope that demand growth will continue to ease and that export growth will keep gaining steam in the coming term.


Bergthora Baldursdottir