As often before, subcomponents relating to travel and transport provided the backbone of the surplus. Travel-related transactions generated a surplus of just under ISK 105bn, while transport and shipping delivered a surplus of ISK 67bn. Other key subcomponents were relatively well balanced, apart from a deficit of ISK 16bn on miscellaneous expert services and technological services and a deficit of ISK 6bn on culture and recreation.

Travel-related FX inflows hit a new high

The Q3 surplus is doubtless evidence of the tourism industry’s post-pandemic comeback. Although Icelanders have been happy to travel recently, inflows of foreign tourists have weighed much heavier.

Export revenues due to passenger transport by air and foreign tourists’ spending in Iceland came to ISK 233bn in Q3. Comparable expenditures due to Icelanders’ travels abroad totalled ISK 61bn, and the cross-border travel balance was therefore positive by a record ISK 172bn. As the chart shows, travel-related turnover has developed in very different ways, depending on whether it is on the exports or imports side. There has been no let-up in year-on-year export revenue growth, whereas spending relating to Icelanders’ travels abroad held relatively stable between years in Q2 and Q3.

The latter development reflects Icelanders’ post-pandemic zeal for travel, followed by the growing impact of higher inflation and rising interest rates on appetite for travel. One of the clearest examples of this was the record number of Icelanders who travelled abroad in October 2022, whereas new data from the Icelandic Tourist Board show that Icelanders’ foreign travel in October 2023 was down nearly one-fifth relative to the prior year.

Furthermore, Statistics Iceland published data this morning on total external trade in goods and services in Q3. Those figures show clearly how solid the balance on services is, and now well positioned it is to overtake goods trade as the backbone of Iceland’s export revenues in the wake of the pandemic-induced glitch. From early October 2022 through end-September 2023, gross revenues from services exports totalled ISK 911bn, whereas gross revenues from goods exports came to ISK 946bn over the same period.

It is also well to remember that a majority of services export revenues represent domestic value creation, both because imported inputs generally constitute a smaller share of the sale price of services than of goods, and because a larger share of goods exporters’ profits revert to foreign owners than is the case with services trade. This is particularly true of energy-intensive industry.

Goods account deficit offsets services account surplus in 2023

On the whole, the deficit on goods trade totalled ISK 94bn in Q3. As is stated above, the services account was in surplus by ISK 150bn during the period. The combined goods and services surplus for the quarter was therefore just over ISK 56bn. This is about the same as in Q3 during the years just before the pandemic, as the third quarter of the year is generally a strong one if extraordinary events such as a global pandemic do not upset international travel.

Over the first nine months of the year, the surplus on combined goods and services trade measured ISK 37bn, or ISK 4bn less than in the same period of 2022. Nevertheless, the outlook is for a more modest deficit in Q4 than in Q4/2022. We therefore consider it likely that the trade account for the year as a whole will be more or less in balance. In our macroeconomic forecast from late September, we projected that goods and services trade would be broadly in balance in 2023, and we think that forecast is quite valid. For the next two years, we expect the trade balance to show a modest surplus.