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Record imports deliver hefty goods account deficit in June

Iceland’s goods account deficit in June was the largest in two years, owing to historically strong goods imports, which in ISK terms came to the largest total ever recorded. Unfavourable developments in goods prices, reduced fish exports, and growing economic activity in Iceland will increase the goods account deficit in the coming term, but the outlook is for the current account to be relatively well balanced this year.

According to preliminary figures from Statistics Iceland (SI), the deficit on goods trade measured ISK 30.2bn in June. The largest goods account deficit in two years, it was driven for the most part by unusually strong goods imports.

Import values at an all-time high

The value of goods imported in June came to ISK 88.9bn, the largest single-month total in ISK terms Iceland has ever recorded. Calculated at constant exchange rates, the month came in second, edged out by goods imports in May 2017. Imports of commodities, operational goods, and fuel were substantial, and imports of ships reached a four-year high of ISK 5.5bn. It is clear that imports are regaining steam as the pandemic recedes and the economy normalises.

Goods exports in the month of June totalled ISK 58.7bn, which in exchange rate-adjusted terms is broadly in line with the pattern of recent months. The export value of marine products totalled nearly ISK 27bn in June, thereby accounting for just under half of goods exports, followed by exports of aluminium (just under ISK 17bn) and other industrial goods (just under ISK 10bn).

Divergent developments across sectors

Developments in exports of key goods categories have diverged widely since the pandemic struck. Early in 2020, goods exports actually contracted, as conditions were highly unfavourable. In 2021 to date, however, marine product exports have gained steam in volume terms, as have aquaculture exports, with volumes for the latter up nearly 50% year-on-year in the first five months of 2021. Export prices for these products have softened over the period, however.

Energy-intensive industrial products have followed the opposite pattern: export volumes contracted slightly YoY in the first five months of 2021, while prices have risen by nearly 14% in ISK terms over the same period. It is worth noting that in trade-weighted terms, the ISK was 2% weaker, on average, than over the same period in 2020. A major factor here is the recent surge in aluminium prices. The reference price for a tonne of aluminium was just over USD 2,500 at the end of June, up from an average of around USD 1,730 in 2020 .

Although aluminium prices have gained substantial ground recently, global price developments are generally unfavourable for goods trade at present. Marine product prices have not yet returned to previous levels in the wake of the pandemic, but there is hope for improvement as restrictions on the activities of restaurants and other large buyers of Icelandic marine products are lifted as part of the pandemic end-game. On the other hand, commodities, food, and fuel have risen strongly in price in recent quarters. Global fuel prices are now above pre-pandemic levels, and various commodities and foods are much more expensive now than they were before the onset of the pandemic.

Growing goods account deficit in the cards

The outlook is for this year’s current account deficit to dwarf last year’s, and for a number of reasons:

  • Stronger economic activity requires increased importation, both of goods for domestic consumption and of inputs for investment and tourism.
  • Although many observers forecast that the high price of commodities and other imported goods will reverse in part once pandemic-induced supply chain disruptions are untangled, it could take some time before that materialises.
  • A 13% reduction in the cod quota for the coming fishing year will make an impact this autumn and into next year.

Pulling in the opposite direction are factors including growth in aquaculture and favourable developments in aluminium prices. In our opinion, though, the above-mentioned factors will weigh heavier.

The goods account deficit in H1/2021 was just over 6% of estimated GDP for the period, slightly exceeding the deficit for 2020 as a whole. Based on the arguments outlined above, the deficit on goods trade will probably be even larger relative to GDP in 2021 as a whole.

Fortunately, Iceland’s largest export sector, tourism, is starting to recover. The outlook is for a massive increase in services revenues in coming quarters. In our opinion, surpluses on services trade and primary income will offset the deficit on goods trade this year, perhaps even delivering a small current account surplus.


Jón Bjarki Bentsson

Chief economist