The recently released Consumer Confidence Index (CCI) fell by 18 points month-on-month, to 44.4 points, its lowest in over nine years, or since October 2010. Since February, when COVID-19 began to spread in Iceland, the index has fallen by a full 31 points. The virus and the restrictions imposed worldwide have significantly disrupted Icelandic society, specifically to include the labour market and the economy. So it comes as no surprise that Icelanders should be pessimistic at the moment.
Private consumption expected to implode
Icelanders are extremely pessimistic about economic and labour market developments and prospects at present. Newly published payment card turnover figures show a sharp contraction in Icelanders’ card use, both at home and overseas. The outlook has deteriorated markedly since the COVID-19 pandemic spread to Iceland, and expectations surveys and payment card numbers suggest that private consumption will crater this year.
Assessment of the current situation disintegrates
All components of the CCI fell between months and are below the 100-point threshold indicating parity between upbeat and downbeat sentiment. The component measuring the assessment of the current situation has declined the most since COVID-19 arrived in the country, falling from 83.5 points in February to 23.4 in April, a plunge of 72% in two months’ time. The second-largest drop is in the assessment of the labour market, which now measures 48.4 points. Both of these components are now at their lowest since 2011.
According to the baseline scenario of the International Monetary Fund’s (IMF) recent macroeconomic forecast, Iceland’s GDP will contract by 7.2% this year. It is obvious that many sectors will be hit hard, not least the tourism industry and the services sectors that have been forced to close up shop since the ban on gatherings was imposed. The IMF projects that unemployment in Iceland will surge to an average of 8% this year, and if that forecast materialises, it can surely be said that the gloomy attitudes reflected in the CCI are well grounded.
Card turnover shrinks
The effects of the COVID-19 pandemic can be seen clearly in payment card turnover figures newly published by the Central Bank (CBI). Turnover on domestic cards totalled ISK 72bn in March, some 9% lower than in February and 16% lower than in March 2019. Use of both debit cards and credit cards contracted sharply between years, with debit card turnover falling 18.5% and credit card turnover falling 13.5%.
After adjusting for price and exchange rate movements, household payment card turnover contracted by 17.5% year-on-year in March. This was the largest contraction since 2009, over a decade ago. The contraction in turnover within Iceland measured nearly 12%, and turnover abroad contracted by 45%. Clearly, travel restrictions imposed by governmental authorities all over the world have called a halt to Icelanders’ overseas travel, causing the implosion in card turnover abroad.
The COVID-19 pandemic can be expected to affect card turnover even more strongly in coming months, as the travel restrictions and the ban on gatherings imposed in March will make their mark on figures for April and, most likely, the months thereafter.
Private consumption set to shrivel
Trends in card turnover and the CCI are useful indicators of developments in private consumption. Restrictions on travel and gatherings will have a major impact on consumption in the coming term, and consumer sentiment and card turnover figures are already sounding the alarm. Both sentiment surveys and card turnover numbers indicate the bleakest private consumption scenario in nearly a decade. Consumption is sensitive to uncertainty at the best of times, and Icelandic households are clearly clutching their wallets tighter in response to the current situation.
Private consumption is an important factor in Iceland’s GDP growth, accounting for about half of GDP in recent years. Consumption will inevitably be hit hard by COVID-19, and we expect it to contract sharply in Q2. For the period thereafter, the uncertainty centres on how long restrictions remain in place and when we begin to see a glimmer of light at the end of the tunnel.