2025 has started reasonably well in terms of the current account balance. In January, for instance, the balance on goods showed a deficit of ISK 7.6bn, according to newly published preliminary figures from Statistics Iceland (SI). It was the smallest deficit in three years, and well below the January 2024 deficit of ISK 19.7bn. Unusually strong exports of aluminium, a year-on-year increase in farmed salmon exports, and limited imports of fuels and consumer goods were among the drivers of the improvement. As the chart indicates, goods trade fluctuates considerably from month to month, and it is therefore impossible to draw firm conclusions based on the January figures.
Smaller goods account deficit but fewer tourists in early 2025
The new year has started well for goods trade, but tourism has been somewhat more sluggish. The outlook is for exports to grow faster than imports in 2025 as a whole. The current account will probably show a smaller deficit this year than last, and the outlook is for it to be fairly well balanced in the years to follow.
The beginning of the year has been somewhat less favourable for the tourism sector, however. Nearly 121,000 foreign nationals departed the country via Keflavík Airport in January, according to new figures from the Icelandic Tourist Board. This is roughly on a par with the same month of 2023 but almost 6% below the total for January 2024.
As before, tourists from the US constitute the largest nationality group, at nearly 27% of the total. They are followed by visitors from the UK (17%), China (8%), Germany (6%), and France (5%). A decline in British tourist numbers by nearly one-third year-on-year was striking, as visitors from the UK were the largest nationality group in January 2024. British tourists have often been the largest group during the winter months, helping to smooth out seasonal fluctuations in the sector. It will therefore give cause for concern if the YoY decline continues in coming months. On the other hand, US and Chinese visitors increased markedly in number between years.
As we have discussed recently. the outlook is for respectable growth in total exports through 2027, owing not least to new sources of growth in both goods and services trade. At the same time, import growth is likely to shrink relative to 2024.
Current account balance set for a gradual improvement
In our newly published macroeconomic forecast, we reviewed prospects for external trade, which is always an important factor in a small open economy like Iceland.
After a surplus in 2023, the current account balance weakened in 2024. The first nine months showed a deficit of ISK 26bn, as a handsome surplus on services trade did not fully offset the large goods account deficit and a moderate deficit on net transfers to and from the country. Furthermore, the surplus on primary income was far smaller than at the same time in 2023. The 2024 current account deficit is estimated at nearly ISK 70bn, or 1.5% of GDP for the year.
The current account balance is set to improve somewhat over the forecast horizon. Even so, there will probably be a slim deficit measuring 0.3% of GDP in 2025. For 2026, the outlook is for a more or less neutral balance, followed by a surplus of perhaps 0.5% of GDP in 2027.
The improvement is largely because export growth is set to overtake import growth in 2025. We also expect a slight improvement in terms of trade over the forecast horizon. In other words, we expect the price of Icelandic exports to develop more favourably than the price of imports. A positive net international investment position (NIIP) and differences in the composition of foreign assets and liabilities should yield a positive rather than negative primary income balance.
Nevertheless, underlying variables have little room for error if a more persistent current account deficit is to be avoided. If the ISK appreciates more than we expect in the coming term, for instance, it could stimulate imports and dampen exports.
Iceland’s net external assets totalled nearly ISK 1,800bn, or 40% of GDP, at the end of September 2024. This strong NIIP is of vital importance for a relatively stable exchange rate, in addition to bolstering international confidence in the Icelandic economy.
The outlook is for the NIIP to remain strong, but whether it improves in coming years will depend partly on developments in foreign markets and whether the current account balance is positive or negative.
