According to data from the Central Bank (CBI), Icelanders used their payment cards to the tune of over ISK 136bn in October, an increase of more than 9% relative to October 2024. In price- and exchange rate-adjusted terms, the real increase measured 7.5% year-on-year. Growth is due primarily to turnover abroad, which surged 19% YoY, while turnover within Iceland grew 4%.
Will private consumption hold its ground?
Household consumption is buoyant at present, despite increased pessimism about the economic situation. Icelanders have been travelling abroad in large numbers, as can be seen in foreign payment card turnover data. Households are well positioned financially, and private consumption will probably continue to grow through the year-end.
Icelandic nationals’ travels make their mark on card turnover
In the recent past, payment card turnover has been driven by Icelanders’ card use abroad, which stems from spending during travel overseas and purchases from foreign online merchants. Travel-related consumption accounts for the vast majority of turnover, however, reflecting the recent surge in Icelanders’ overseas travels.
According to the Icelandic Tourist Board, Icelandic nationals’ trips abroad were up 18% YoY in the first ten months of the year, and 2025 as a whole is shaping up to be a record year. The current record was set in 2018, when 688,000 Icelandic nationals departed via Keflavík Airport, but thus far in 2025 the total already stands at 618,000. It is worth noting, though, that the measurements are based on samples, and the tally is therefore not precise.
Car purchases are increasing but expectations are declining
New registrations of motor vehicles to individuals increased by 48% in the first ten months of 2025, after contracting in 2024. These transactions affect payment card turnover only to a limited degree, but they do give a strong indication of overall demand and the pace of private consumption. Some households will probably expedite car purchases this year, particularly in the case of cars powered solely or partly by fossil fuels, as excise taxes on them will increase at the turn of the year.
It is interesting to see, however, that despite a noticeable upturn in demand, households’ expectations have dimmed significantly in the recent past. The Gallup Consumer Confidence Index has fallen markedly since the summer, hitting 73.5 points in October, its lowest since September 2024. Presumably, expectations about the economy have sagged in recent months because of repeated export shocks followed by changes in the mortgage market. Persistent inflation and high interest rates are surely a factor as well.
Wage gains in line with the average
One of the main reasons households are so well positioned is that real wages have been growing in the past few years, despite high inflation. According to recent data from Statistics Iceland (SI), the wage index has risen 7.7% in the past twelve months, well in line with the ten-year average of 7.6%. The twelve-month pace of growth has eased since the beginning of 2025, however, due to the temporary effects of two negotiated pay rises that were included in the twelve-month measurement.
Annualised real wage growth now measures 3.4% and has remained around that level in the recent term in spite of persistent inflation. An increased slack has now developed in the labour market, and unemployment has been creeping upwards. Even so, the outlook is for real wages to keep growing, albeit more slowly than before. Given that the labour market has softened, we think pay rises will be broadly in line with contractual provisions in the near future, and we do not expect significant wage drift.
Private consumption holds its ground
Private consumption seems to be holding its own, even in the face of persistent inflation and high interest rates. In real terms it grew 3% YoY in H1/2025, the fastest pace recorded in two years. Recent developments in key indicators suggest that private consumption will keep growing briskly in the coming term. The first figures from Q3 will be included with SI’s national accounts publication this coming Friday.
In the past decade, private consumption has grown by an average of 2.3%, albeit with wide fluctuations. In our macroeconomic forecast from this autumn, we projected that growth would keep the pace set in H1 and measure about 3.1% for 2025 as a whole. We still consider this forecast valid. In its new forecast, published last week in Monetary Bulletin, the CBI revised its private consumption growth forecast downwards – to 3.1% for the year as a whole.
Growth will probably be a bit slower in the next two years, but still above average. In our macroeconomic forecast, we assume that growth will measure 2.8% in 2026 and 2.7% in 2027. Real wages look set to keep rising, and households are still saving at a good clip, which will support demand in the coming term. Households will probably draw down their savings more in 2026 in order to sustain consumption. On the other hand, population growth will probably be much slower than in recent years, and higher unemployment could put a dent in consumption for some households. The CBI’s forecast is similar to ours: the bank projects private consumption growth at 2.8% in 2026, as we do, and then expects it to tick upwards to 3.1% in 2027.
