More households and businesses are shoring up their defences

Recent expectations surveys conducted among Icelandic households and businesses suggest that respondents are shoring up their defences to an increasing degree. Labour shortages are less pronounced at large companies, and many firms expect to invest less this year than in 2022. Weaker growth in domestic demand is part of the post-expansionary adjustment towards equilibrium.

The Gallup Consumer Confidence Index shows that consumers have scaled down their expectations about economic developments and prospects since the beginning of 2022. That said, expectations have been relatively stable recently, at just below the 100-point threshold marking parity between upbeat and downbeat sentiment. In March, however, the index measured just below 90 points, its lowest value since August 2022, and it was mainly the component measuring expectations six months ahead that took a nosedive between February and March.

Downturn in household motor vehicle purchases year-to-date

Gallup has also published the results of its most recent quarterly survey of consumers’ major purchase plans. This so-called big-ticket index fell somewhat between surveys, owing to simultaneous declines in all major expenditure categories: overseas travel, motor vehicle purchases, and home purchases. As regards car purchases, the past few quarters’ slide accords with figures recently published by Bílgreinasambandið (BGS), an umbrella organisation representing companies engaged in the sale and service of motor vehicles. BGS’ data show that the sale of new passenger cars to individuals contracted by over 6% year-on-year in Q1/2023. It is worth noting here that 6,907 new cars were sold to individuals in 2022, an increase of 13% relative to the prior year.

The Consumer Confidence Index and the big-ticket index give quite a reliable indication of upcoming developments in private consumption. Recent developments in both indices support our projection, published in our macroeconomic forecast from early February, that private consumption is set to grow much more slowly after hitting a 17-year high in 2022.

Firms trimming their sails

The Confederation of Icelandic Employers recently published a press release outlining the results of the quarterly expectations survey carried out among Iceland’s 400 largest companies. As is the case with households, corporate executives have toned down their assessments of current developments and near-term prospects for the economy.

One-fourth of executives consider conditions in the economy favourable rather than unfavourable – only half as many as in the survey taken a year ago. A similar proportion expect conditions to improve in the next six months, up from 21% in the December 2022 survey.

The corporate expectations survey gives an indication of what lies ahead for business investment in Iceland. There is a relatively strong correlation between six-month expectations and general business investment six months ahead, and furthermore, Gallup explicitly asks survey respondents twice a year about their investment plans. The most recent survey showed a significant downturn in investment plans relative to the previous one, taken in September 2022. This past autumn, companies were quite upbeat about investment, and most executives expected to invest more in 2022 than in 2021.

That situation has reversed, and now some 27% of executives expect to invest less this year than last year. One-fifth expect to increase their investment between years, and just over half expect their investment levels to remain broadly flat year-on-year. As the chart indicates, zeal for investment is greatest in the construction and utilities sectors, followed by manufacturing, tourism, and tourism-related sectors. No fishing companies are planning to increase investment this year, according to the survey.

Furthermore, the survey suggests that the labour market is rebalancing. When the market was at its tightest, nearly 57% of firms considered themselves understaffed. In the most recent survey, that share has fallen to just below 40%, roughly where it was in Q4/2021. As before, worker shortages are most pronounced in the construction industry, and it is there that executives expect to add on staff in coming months.

From offence to defence?

Based on all of this, it seems as though Icelandic households and businesses are increasingly playing a defensive game this year, after eighteen months or so of buoyant domestic demand. Given the ambiguous global economic outlook, persistently high inflation, and steep rise in interest rates, such a shift is understandable. In early February, we projected that domestic demand – a blanket term capturing Icelanders’ consumption and investment – would grow by 2.5% in 2023, well below the more than 6% growth rate seen in both 2021 and 2022. Considerably slower growth in private consumption plays a major role in this downturn, but we also expect investment to grow much more slowly. In particular, business investment looks set to be broadly flat year-on-year, after growing by 15% in 2022.

As a result, the economy appears to be moving towards greater equilibrium after a GDP growth episode that has been “well above the level the domestic economy can sustain in the long run”, to quote the Central Bank Monetary Policy Committee’s most recent statement. If this forecast materialises, we Icelanders can be well satisfied, as there are few signs of an imminent economic contraction here, which is more than can be said for many of our neighbouring countries.


Jón Bjarki Bentsson

Chief economist