Peak tourism season firms up after a sluggish start

The peak tourist season was more bountiful than had been anticipated at the beginning of summer. Sizeable revenues from foreign tourists probably tipped the current balance into surplus territory in Q3, despite a hefty goods account deficit. The outlook is for the current account to show a deficit this year and then be in balance in 2025 and 2026.


Tourist numbers rose marginally in Q3

In all, 223,000 foreign nationals departed Iceland via Keflavík Airport in September, an increase of just over 2% year-on-year. In keeping with the recent pattern, visitors from the US comprised the largest nationality group, at 32% of the total, while in absolute terms their numbers were unchanged YoY . Second in line were Germans, at 6.9%, although their raw numbers fell slightly between years. They were followed by Polish (5.2%), Canadian (4.9%), and British (4.8%) nationals. The other Nordic countries combined accounted for 4.5% of the visitor total in August.

September figures tell a tale similar to that from July and August as regards tourist numbers: This year’s peak season righted itself after a tepid beginning. On the whole, the number of foreign nationals travelling through Keflavík Airport rose by 1% YoY in Q3. In this regard, the quarter therefore turned out markedly better than Q2, when foreign visitors departing via Keflavík Airport after a stay in Iceland declined in number by 5% YoY. It is noteworthy than September 2024 was a stronger month in terms of visitor numbers than June was. This has never happened before, with the salient exception of 2020-2021, during the height of the pandemic.

Thus far in 2024, the number of departing foreign nationals is up 1% between years, to a total of 1.7 million in the first three quarters combined. This trend accords quite well with the projections in our recent macroeconomic forecast, which provides for no change in total tourist numbers between 2023 and 2024.

Goods account deficit remains wide

According to recently published preliminary figures from Statistics Iceland (SI), the balance on goods showed a deficit of ISK 27.5bn in September, about twice that seen in the same month of last year. It is worth mentioning, though, that September 2023 was an outlier in the sense that the goods account deficit was much smaller than in the months immediately before and after. In comparison with the past few months, however, the September 2024 deficit was relatively small.

The value of exported goods came to ISK 87bn in September, which represents a YoY contraction of 3% in ISK terms, at each year’s respective exchange rate. There was a marked contraction (-12%) in exports of marine products, offset by an 8% increase in revenues from industrial goods exports and a surge of nearly one-third YoY in revenues from farmed fish exports, for instance.

At the same time, goods imports totalled ISK 115bn, an increase of 10% YoY in ISK terms, although import values were noticeably small in September 2023. Among the factors driving this trend are a jump of one-fourth YoY in imports of commodities and operational inputs and a rise of over one-fifth YoY in imports of generic consumer goods.

If we look past month-to-month fluctuations, we can detect a certain stability in the goods account deficit, as can be seen in the dark broken line in the chart above, which shows the twelve-month moving average deficit on goods trade. After growing apace at the beginning of the economic recovery in 2021-2022, the average monthly goods account deficit has been relatively stable at just over ISK 30bn by this measure since mid-2023.

It is also useful to examine exchange rate-adjusted YoY changes in imports and exports. In terms of three-month moving averages, goods exports have been picking up recently, while imports appear to be holding broadly steady. On the imports side, there has been a marked contraction in imports of various types of transport equipment, as well as in imports of fuels. On the other hand, imports of many other types of goods have been growing YoY.

Current account deficit in 2024 despite the Q3 surplus

The outlook is for a surplus on the current account in Q3, in keeping with the overarching pattern of the past 15 years or so. The deficit on goods trade measured ISK 96bn for the period, in terms of SI’s FOB/CIF definition, whereas on a balance of payments basis, the deficit was probably somewhat smaller, as is usually the case in SI’s accounts. It can be assumed that there was a deficit on secondary income, as has often happened in the past. The secondary income deficit has averaged just under ISK 12bn per quarter in the recent term.

Offsetting this is a surplus on services trade, owing mainly to the peak tourist season. The services account surplus hit a new high of ISK 155bn in Q3/2023. This year’s Q3 surplus will probably be somewhat smaller, although we would not be surprised if it exceeded ISK 100bn. There is greater uncertainty about the primary income balance, which has been quite volatile in recent years, mainly because of the operating performance of Iceland’s three aluminium smelters, which are all foreign-owned. Nonetheless, we do not expect a deficit on secondary income combined with deficits on goods trade and secondary income to overtake the services account surplus.

In our macroeconomic forecast from September, we discussed developments in external trade and prospects for the coming term. In that forecast, we note that the current account balance deteriorated again in H1/2024, showing a deficit of ISK 78bn, as compared with a deficit on ISK 9bn in H1/2023. A smaller surplus on services trade was a major driver, plus a larger goods account deficit and a weaker balance on income.

Although the peak tourist season will doubtless bolster the current account in H2, the outlook is for a CA deficit of just over 1% of GDP in 2024 as a whole. In all likelihood, though, export growth will deliver a balanced current account in 2025 and 2026. Developments in terms of trade could make a real difference here. We expect export prices to improve slightly more than imported goods and services prices in the coming term.

If the ISK appreciates more than we anticipate or if terms of trade worsen materially, the CA surplus could flip to a deficit around the mid- to late 2020s.

Analyst


Jón Bjarki Bentsson

Chief economist


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