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Sizeable Q1 goods account deficit largely offset by growing tourism-generated revenues

Iceland’s goods account deficit was a hefty one, but it was probably offset to a large degree by the surplus on services trade. The outlook is for a record year for tourism-generated revenues. A better balance on external trade as the year progresses reduces the likelihood that FX outflows due to the current account deficit will weaken the ISK again.

March was a buoyant month for tourism in Iceland. A total of 161,000 foreign nationals departed the country via Keflavík Airport during the month, and only three times – in 2017 through 2019 – has the March total been larger. As in recent months, British travellers comprised the largest nationality group, at 24% of the total. They were followed by Americans, at just under one-fifth, and then Germans (7%), Poles (6%), and Italian and French visitors (5% each).

Will 2023 be a record year for tourism revenues?

In 2023 to date, more than 419,000 tourists have travelled to Iceland via Keflavík Airport, or 87% of the Q1 record, set in 2018. In our most recent macroeconomic forecast, published in early February, we projected that tourist arrivals would total 418,000 in Q1/2023, a scant thousand fewer than the actual total.

The outlook is favourable for tourism in 2023. Demand for travel to Iceland is strong, concerns about matters such as the impact of a weakening economy on tourist appetite have not materialised, and flights and cruises to Iceland are at a historical high. Most indicators imply that our forecast of 2.1-2.2 million tourist arrivals will materialise, and that the total will be closer to the upper end of that range than to the lower end. The sector could generate the equivalent of ISK 600bn in FX revenues this year, which would be a historical record.

Hefty deficit on goods trade early in 2023

The goods account balance has been highly volatile in recent months, hitting a record high last autumn and then narrowing considerably around the turn of the year. In the past two months, however, the deficit has grown once again, to nearly ISK 25bn in February and an estimated ISK 27bn in March, according to preliminary figures from Statistics Iceland (SI). The March estimate is the largest deficit since last November.

Goods imports totalled nearly ISK 116bn in March, also the biggest monthly total since last November. At constant exchange rates, goods imports increased by nearly 8% YoY. The surge is due in large part to importation of investment goods and transport equipment (both passenger cards and larger motor vehicles), as well as to imports of fuels (jet fuel in particular). This can be viewed as a positive development in comparison with the recent past, when import growth was driven mainly by consumer goods.

For example, the YoY increase in passenger car imports in Q1 was due primarily to a 32% jump in new vehicle purchases by car rental agencies, whereas individuals’ car purchases contracted nearly 6%, according to data from Bílgreinasambandið, the agency representing motor vehicle sales and service entities.

Goods exports totalled just over ISK 88bn in March, a decline of nearly 2% YoY at constant exchange rates. The contraction between years is due largely to reduced exportation of aluminium, miscellaneous manufactured goods, and aquaculture products. Exports of marine products increased markedly between years, however.

Growth in goods imports and exports has eased significantly after having surged from spring 2021 through autumn 2022. In Q1/2023, export growth measured just under a percentage point YoY at constant exchange rates, while import growth measured more than 10%.

Trade account to show a deficit early this year and then strengthen further ahead

Currently available indicators of goods and services trade suggest a sizeable deficit in Q1, albeit considerably smaller than in the quarter beforehand, when the combined deficit on goods and services came to nearly ISK 62bn.

Preliminary figures from SI indicate that the goods account deficit for Q1 came to ISK 67bn. about the same as in Q3/2022. Our estimates concerning services trade, which are based on passenger numbers, card turnover data, and other indicators, suggest a surplus of around ISK 45bn during the quarter. If this estimate proves accurate, the deficit on combined goods and services trade in Q1/2023 will probably be just north of ISK 20bn.

In our macroeconomic forecast from early February, we projected that the current account could show a deficit of 1.4% of GDP in 2023 as a whole. That corresponds to about ISK 57bn, as compared to last year’s deficit of ISK 58bn. Presumably, the deficit will be confined mostly to the first half of the year, with H2 showing a reasonable surplus, particularly given the promising outlook for the upcoming peak tourist season. Consequently, external trade will probably be less of a drag on the ISK exchange rate as the year progresses.


Jón Bjarki Bentsson

Chief economist