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Payment card turnover figures indicate a marked slowdown in domestic demand

The most recent payment card turnover data suggest that the economy continues to cool rapidly. The year-on-year contraction in October turnover is the largest since beginning of 2021. Repeated interest rate hikes and high inflation appear to be affecting Icelanders’ consumption, and the Central Bank’s monetary tightening phase is probably nearing its end.

Turnover with domestic payment cards was virtually unchanged YoY at just over ISK 110bn in October, according to data from the Central Bank (CBI). In price- and exchange rate-adjusted terms, households’ card turnover contracted by 6.9% YoY in October, the biggest downturn between years since the beginning of 2021, when the impact of the pandemic on household consumption was at its strongest.

Icelanders’ card turnover both at home and abroad shrank YoY in real terms in October. Card use within Iceland was down 4.8%% YoY, while turnover abroad was down by around 14% over the same period. Icelandic households’ card use in Iceland has now contracted for seven months in a row, while their card turnover abroad has shrunk for the past five months.

Overseas travel down sharply

The contraction in Icelandic households’ overseas card use goes hand-in-hand with the recent turnaround in their zest for travel. According to data from the Icelandic Tourist Board, Icelandic nationals’ departures via Keflavík Airport have contracted YoY every month since April (apart from July). In October, for instance, Icelanders’ airport departures were down 22% relative to the same month in 2022.

At the same time, turnover using foreign cards within Iceland has developed broadly in line with the YoY rise in tourist visits to Iceland. In October, foreign card use totalled just over ISK 26bn, an increase of 26% between years. More than 200,000 foreign nationals arrived in Iceland via Keflavík Airport in October, according to the Icelandic Tourist Board, which translates to a 29% increase relative to October 2022.

As is noted above, foreign payment card use in Iceland totalled just over ISK 26bn in October, whereas domestic payment card use abroad came to slightly more than ISK 23bn. This means that the payment card turnover balance was once again positive in October, as it has been since May.

Icelanders squeezed by high inflation and interest rates

In our opinion, these developments in card turnover indicate a shift in Icelanders’ consumption behaviour. Households appear to be hitting the brakes rather decisively at present, capping a two-year spending spree. Private consumption grew 8.5% in real terms in 2022, but Statistics Iceland’s figures for H1/2023 show a growth rate of 2.5% for the half and only 0.5% in Q2. Clearly, the CBI’s frequent policy rate hikes have begun to bite, and Icelanders have started to feel the effects of high interest rates and inflation quite strongly.

Most other reliable indicators of private consumption also indicate slower growth in the near term. Chief among them are Gallup Consumer Confidence Index data, which hit their lowest since year-end 2020 this past October.

The outlook is for even weaker private consumption growth in H2 than in H1. In our autumn macroeconomic forecast, we projected that private consumption growth would measure a scant 2% this year, and the figures above suggest that this figure is still valid. It should be borne in mind that private consumption per capita will therefore contract because of the recent surge in population, while overall consumption is still expected to increase. Private consumption has been one of the main drivers of GDP growth in the recent term, and weaker private consumption growth accounts for the lion’s share of the reduced GDP growth we expect for 2023 as a whole. The CBI’s Monetary Policy Committee will surely take note of this, and we think the monetary tightening phase will soon come to a close if it has not already done so. We expect the MPC to hold the policy rate unchanged on the next decision date, which comes on Wednesday of this week.


Bergthora Baldursdottir