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Payment card turnover abroad contracts

Developments in payment card turnover suggest that private consumption shrank markedly in the latter half of the summer. But domestic consumption offers some comfort, as it probably did not contract during that period, limiting the total impact on domestic demand. The modest uptick in tourist arrivals after border restrictions were eased was enough to offset Icelanders’ card turnover abroad over the same period.

Total turnover from domestic-issued cards amounted to 88 in August, according to recent figures from the Central Bank (CBI). In krónur terms, this is equivalent to a contraction of nearly 11% month-on-month and just over 4% year-on-year. In price- and exchange rate-adjusted terms, the contraction in card turnover measured 9.6% YoY.

Domestic consumption stayed afloat this summer

The YoY change in domestic versus foreign card turnover diverged widely, as could be expected given the collapse in Icelanders’ overseas travel. Domestic turnover was virtually unchanged in real terms, while foreign turnover fell by more than half. However, turnover abroad reflects more than just Icelanders’ spending while travelling abroad. It also includes online shopping with international e-commerce companies, which has steadily gained ground in recent years.

In general, card turnover gives a fairly strong indication of how private consumption is developing. The figures for the past twelve months sketch a rough outline of two likely developments in Q3:

-        The outlook is for a sizeable contraction in private consumption during the quarter. In July and August, total card use contracted by nearly 7% YoY in real terms.

-        The contraction is entirely due to a collapse in overseas turnover. Real growth in card turnover within Iceland measured 3.6% YoY in July and August, while turnover outside the country contracted by 53% over the same period.

The impact of unemployment has not yet come fully to the fore

It can be assumed that income losses are not yet a major factor in the contraction in consumption. Real disposable income has continued to rise year-to-date in spite of headwinds in the economy – an unusual situation during a downswing in Iceland. Unemployment has risen swiftly, however, and job numbers are down. Although the impact on disposable income is still muted by the payment of wages during the termination notice period, the Government’s part-time unemployment benefits scheme, and income linkage of unemployment benefits during the first months, it is inevitable that higher unemployment will start to affect consumption patterns more strongly in the months to come.

Furthermore, consumer sentiment among Icelanders has deteriorated sharply in 2020 to date, indicating the likelihood of a further contraction in consumption in H2. The surge in domestic card turnover following the relaxation of public health measures this spring shows how resilient the consumption urge is, though. Further ahead, developments in private consumption will depend in large part on the path the pandemic takes – and thereafter, on how quickly the labour market recovers.

Mercurial payment card turnover balance

It is instructive to compare Icelanders’ card turnover abroad with foreign cardholders’ turnover in Iceland. The difference between the two – which we have chosen to call the payment card turnover balance, with reference to the relevant part of the balance on services trade – has reflected massive inflows of foreign currency concurrent with Iceland’s tourism boom in the past decade.

But since the COVID-19 pandemic came to call, the situation has soured. The card turnover balance now reflects the collapse in foreign-issued card use in Iceland, with such turnover virtually non-existent in April and May and very limited in June. As the chart shows, however, the uptick in tourist arrivals in July and August sufficed to offset Icelanders’ card use abroad over the same period, even though the total number of visitors was only a fraction (roughly 1/5) of that seen in the same months of 2019.

Although it can be assumed that the card turnover balance deteriorated again after restrictions at the border were re-tightened in mid-August, it is heartening to see how quickly it could recover once the direct and indirect effects of the pandemic start to taper off.


Jón Bjarki Bentsson

Chief economist