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Peak tourist season off to a roaring start

Last month came within a hair’s breadth of smashing Iceland’s all-time June record for tourist arrivals. The outlook is for sizeable card turnover-related foreign currency inflows in June, followed by more of the same in the months thereafter. Robust growth in services revenues – not least from tourism – weighs heavily in our forecast of an improving current account balance and a stronger ISK in the coming term.

This year’s peak tourist season began with great gusto. According to recent data from the Icelandic Tourist Board, foreign nationals’ departures from Keflavík Airport totalled 233,000 in June, trailing the June 2018 peak of 234,000 by barely a whisker.

Americans were the largest nationality group by far, according to the Tourist Board’s numbers, at 101,000 arrivals in June – only the second time on record that more than 100,000 tourists from the US have visited Iceland in a single month. The US accounted for more than four of every ten foreign tourists in June, followed by Germany (7.6%), Poland (7.0%), the UK (4.4%), and France (4.2%). The Nordic countries combined accounted for just under 5% of the June total.

Icelanders tone down their travels

Concurrent with the surge in foreign tourist arrivals, Icelanders have moderated their overseas travel. Some 55,000 Icelanders departed via Keflavík Airport in June, fewer than in May (62,000) and in June 2022 (66,000). While this may well indicate that Icelanders have taken the edge off their pent-up thirst for travel from the pandemic, it could also show that inflation is eroding the contents of their wallets at the moment.

The upward trend in foreigners’ visits to Iceland versus Icelanders’ reduced overseas travel bodes well for the balance on services. Cross-border travel plays an important role in the services account, although services trade naturally takes many forms. Statistics on Icelanders’ payment card turnover abroad are not yet available for June, but according to data on foreign payment card use in Iceland in H1/2023, published yesterday by the Icelandic Centre for Retail Studies, turnover with foreign cards totalled ISK 36bn in June, an increase of more than a fourth year-on-year.

In all likelihood, this jump represents the seasonal surge in payment card-related FX inflows, which typically lasts from June through at least September. As the chart indicates, there is a close correlation between fluctuations in the payment card turnover balance and in the services account balance as a whole. The peak tourist season therefore strongly offsets Icelanders’ overseas spending and other FX outflows relating to imported consumption and investment, as it has in recent years.

Tourism tops up Iceland’s FX tanks
In our most recent macroeconomic forecast, published in late May, we projected that tourist numbers would exceed 2.1 million this year, putting 2023 in second place in Iceland’s all-time visitor rankings. This total will be boosted by tourists arriving via other domestic airports, the Smyril Line ferry, and foreign cruise ships. The most recent tourist industry data indicate that our forecast still holds and, if anything, is on the safe side. Our rough estimate suggests that this year’s tourism-generated FX revenues could come to an all-time high of around ISK 600bn, although the goods account deficit could turn out somewhat larger than we had anticipated.

Prospects for the current account balance are still in line with our May forecast, however. We projected the CA deficit for the year at 0.7% of GDP (just over ISK 30bn), with booming export growth – thanks mainly to tourism – doing most of the heavy lifting in narrowing the CA deficit relative to 2022. We then expect the current account to show modest surpluses in 2024 and 2025. As we have discussed recently, this improvement in external trade is one of the chief reasons we expect the ISK to strengthen somewhat in the coming term.


Jón Bjarki Bentsson

Chief economist