Tourism a strong FX generator during the quarter

In keeping with the usual pattern, the peak tourist season contributed strongly to the handsome surplus for Q3,  with travel-related consumption in the black by nearly ISK 107bn and cross-border trade in connection with transport and shipping generating a surplus of almost ISK 64bn. Most other subcomponents of the services account balance were in deficit, however. For example, expenditures due to purchases of tech services and other business services exceeded foreign revenues from the same services by nearly ISK 11bn. Net expenditures for expert, administrative, and advisory services came to almost ISK 5bn during the quarter, and last but not least, direct payments and other items relating to financial services exports exceeded revenues from those services by nearly ISK 3bn. This last item has seen a reversal in recent quarters, as it had previously generated regular surpluses.  Presumably, the explanation lies in growing business between domestic entities and foreign credit card transaction acquirers. As we have discussed previously, the acquiring market has changed quite rapidly in the recent term.

The scope of tourism activity at any given time can be seen in data on travel, on the one hand, and on passenger transport by air, on the other. The former of these reflects tourists’ spending while travelling, and the latter reflects the direct cost of transportation.

In Q3/2024, these two items together generated export revenues in the amount of ISK 241bn, an all-time record in ISK terms. On the other hand, Icelanders’ overseas travel-related spending increased markedly between years, to almost ISK 69bn in Q3. The surplus on such services trade was virtually identical to that in Q3/2023, at just under ISK 172bn. These figures accord well with previously released data on passenger departures via Keflavík Airport, overnight stays, and payment card turnover, supporting the conclusion that this year’s peak tourist season turned out fairly good despite the uncertain outlook this past spring.

Slim trade surplus in 2024 to date

Figures for two of the main components of the current account balance are now available for Q3.  On a balance of payments basis, the goods account was in deficit by ISK 76bn during the period, or ISK 6bn less than in Q3/2023. The improvement is due to a 7% year-on-year increase in goods exports, offset by a 2% rise in goods imports during the period. As is noted above, services trade generated a surplus of ISK 141bn, and the surplus on combined goods and services trade was therefore just over ISK 64bn in Q3, more than offsetting the H1/2024 trade deficit of just over ISK 56bn.

For the first nine months of 2024, then, goods and services trade generated a total surplus of slightly more than ISK 8bn. This is a considerably poorer outcome than in 2023, when the 9m surplus came to nearly ISK 61bn. This year’s weaker services account balance is the main driver of the change.

Tourism and intellectual property gaining ground

The tourism industry has emerged from the pandemic with guns blazing and has regained its former status as Iceland’s single largest export sector. In terms of twelve-month moving totals, tourism has generated nearly 33% of total export revenues in recent quarters. Over the same period, the two largest goods export sectors – fishing and aluminium manufacture – each contributed about 15% of total export revenues.

On the other hand, it should be noted that the fourth pillar of export revenues, intellectual property, is making steady gains and has become a very important source of revenues from abroad. Statistics Iceland does not publish comprehensive data on this type of export revenue specifically, as the intellectual property sector captures various types of services and goods production ranging from the manufacture of medical products and pharmaceuticals to the creation of computer games.

The Federation of Icelandic Industries, however, has compiled data on developments in the sector. The Federation’s experts estimate that export revenues generated in 2023 by the intellectual property industry totalled ISK 263bn, or 14% of total revenues from exports of goods and services during the year. Therefore, a fair share of the light yellow, light grey, and dark [purple] columns in the chart above represent such exports, indicating that intellectual property now stands shoulder-to-shoulder with fishing and aluminium as one of the cornerstones of Iceland’s export revenues.

The Central Bank (CBI) will publish figures on the Q3 balance of payments a week from now. We expect those figures to show a sizeable surplus. For the year as a whole, though, the current account looks set to show a deficit, given the hefty deficit from H1. The outlook further ahead has improved, however, and we anticipate a broadly balanced current account in 2025 and 2026.