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Private consumption, investment, and tourism drove GDP growth in Q1/2022

Buoyant domestic demand and the rebound of tourism explain the lion’s share of Iceland’s rapid GDP growth in Q1/2022, with strong import growth pulling in the opposite direction. Output growth figures indicate that the economy is quickly regaining its footing after the pandemic. The outlook is for exports to gain momentum as the main driver of growth as the year progresses.

GDP grew by 8.6% year-on-year in real terms in Q1/2022, according to newly published data from Statistics Iceland (SI). While this is Iceland’s fastest real GDP growth rate in over five years, it is important to bear two things in mind: first, that quarterly national accounts data can fluctuate widely from one quarter to the next, and second, that the numbers are preliminary. Nevertheless, they sync well with other Q1 indicators suggesting that the economy is chugging along at a brisk pace and the impact of the Corona Crisis is dwindling rapidly.

Both domestic demand and exports grew strongly during the quarter. Investment grew by over 20%, private consumption by nearly 9%, and exports by more than 28%. Pulling in the opposite direction was a 34% YoY increase in import volumes, however. The contribution of net trade to output growth was therefore negative despite the surge in exports, as rapid growth in both investment and private consumption calls for a significant increase in imported inputs.

Upswing in business investment

After contracting sharply in the first year of the pandemic, investment spiked in Q2/2021 and grew by nearly 14% in 2021 as a whole. Strong growth continued in Q1/2022, particularly in business investment, which soared by over 38% during the quarter. According to SI, there was substantial investment in aircraft during the period, but even excluding ships, aircraft, and energy-intensive industry, the YoY growth rate was over 19%. Public investment grew by 1.4% at the same time.

Notably, residential investment contracted by nearly 7% in Q1/2022 after starting to shrink in mid-2021. In 2021 as a whole, it contracted by just over 4%. This gives cause for some concern, given the imbalances and shortages that have characterised the housing market in the recent past. Even so, we do not consider it appropriate to overinterpret these figures, as there are various signs that residential investment is gaining steam. Indeed, we think it likely that the growth will resume in earnest in the not-too-distant future.

Tourism growing apace after the COVID-induced collapse

The tourism industry has rebounded strongly in 2022 to date, as we discussed in a recent issue of Icelandic Market Daily. Some 245,000 tourists visited Iceland in Q1/2022, about 20 times the total for the same quarter of 2021, and tourism-generated revenues came to ISK 52bn. This upsurge accounted for the bulk of the nearly 81% YoY growth in services exports. In addition, goods export volumes grew nearly 9% between years, bringing YoY growth in combined goods and services exports to more than 28%, as is mentioned above.

All this notwithstanding, imports carried the day in Q1, with goods imports growing by over 21% YoY, about the same pace as in recent quarters. The aforementioned aircraft purchases weighed heavily in the increase, but because investments in transport equipment have a comparable but opposite impact on import figures, they make very little impact on GDP growth figures. Services imports grew even more swiftly, owing to Icelanders’ eagerness to travel abroad again after two years of pandemic-related constraints in 2020 and 2021. Services imports grew by almost 69% YoY. As was the case with services exports, this was the fastest YoY growth rate since measurements began in 1995. Naturally, though, it should be borne in mind that travel to and from Iceland – by local and foreign nationals alike – lay virtually comatose a year ago.

Private consumption growth bounces back

Private consumption rebounded strongly in 2021, supported by real wage growth, an improving employment situation, favourable interest rates, rising asset prices, savings accumulated during the pandemic, and a growing sense that the pandemic was on the wane after vaccination rates started rising in earnest. Consumption growth peaked in real terms at 13% YoY in Q4/2021, the fastest rate recorded since 2005, but as with services trade, it is essential to bear in mind how extraordinary the situation was for most of 2020.

According to SI, Icelanders’ aforementioned zest for travel can be seen in the large share of private consumption growth that is associated with overseas travel and consumption spending abroad. New car purchases also surged relative to the same quarter in 2020 [sic], while there was a contraction in purchases of various items such as housewares and fixtures, which had accounted for a large share of Icelanders’ consumption for home use. In addition, the figures show that Icelanders were likelier to head for the pub – in Iceland or abroad – than to drink at home, as alcoholic beverage sales for home consumption contracted YoY.

From demand-driven to export-driven growth

In our newly published macroeconomic forecast, we project year-2022 GDP growth at 5%. As the year advances, exports will increasingly be the mainstay of growth, and growth in domestic demand – both investment and consumption – will lose pace. SI’s figures for Q1 therefore chime nicely with our forecast for 2022.

For 2023, we forecast that GDP growth will measure 2.7%, with exports once again the main driver, although growth in exports and domestic demand will ease year-on-year. For 2024, the final year of the forecast horizon, we project GDP growth at 2.6%. By then, export growth will have started to ease significantly, and tight economic policy and supply constraints will slow the pace of growth.


Jón Bjarki Bentsson

Chief economist