Springtime rebound in services trade

The services account rebounded strongly in Q2/2022, thanks mainly to a surge in tourism revenues, and showed a surplus that offset most of the hefty goods account deficit for the period. The outlook is for a continued recovery of external trade in coming quarters.

According to newly published figures from Statistics Iceland (SI), the surplus on external services trade totalled ISK 33.3bn in Q2/2022, nearly ISK 10bn more than in the same quarter of 2021 and the second-largest quarterly services account surplus since the pandemic struck in early 2020. Services exports totalled nearly ISK 184bn, an increase of almost 80% year-on-year in ISK terms. On the flip side, Icelanders’ foreign services purchases skyrocketed a full 90% between years, to just over ISK 150bn in Q2.

The favourable services account balance is due largely to a sizeable surplus on travel- and transport-related services: The surplus on transport and transit was just over ISK 31bn, and the travel-related surplus measured nearly ISK 29bn. This was offset by a deficit of ISK 22bn on services trade classified by Statistics Iceland (SI) as “Other business services”, which includes research and development, technological services, and miscellaneous specialist and consulting services. There was also a deficit of almost ISK 5bn on culture- and recreation-related services. And finally, intellectual property usage generated a deficit of just over ISK 1bn, although it is a highly volatile item and generally delivers a handsome surplus in Q4 of each year.

Surge in tourism-generated revenues

Revenues from foreign tourists have been picking up strongly ever since the dampening impact of the pandemic on appetite and capacity to travel has tapered off. Total tourism-generated revenues came to nearly ISK 115bn in Q2, the strongest performance since the heyday of the tourism industry in 2019. But Icelanders have been increasingly eager to travel recently, as can be seen in travel-related expenditures of more than ISK 59bn in Q2 – one of the largest single-quarter totals in the history of SI data. On the whole, trade relating to cross-border travel generated a surplus of ISK 55bn, the second-largest surplus on this item since the onset of the pandemic.

External trade on the mend

Combined goods and services trade generated a deficit of ISK 7bn in Q2, a marked improvement over the Q2/2021 deficit of ISK 32bn. As is noted above, the services account showed a surplus of more than ISK 33bn during the period. The deficit on goods trade measured slightly over ISK 40bn, however. Consumption- and investment-related imports have been buoyant in 2022 to date, and in ISK terms, goods imports were up nearly 23% YoY in Q2. But they were overtaken by goods exports, which grew 38% YoY in ISK terms.

Si figures show unequivocally how strongly tourism has recovered in recent quarters after the two-year coma brought on by the pandemic. As the chart indicates, goods exports regained the lead as the main driver of export revenues after the pandemic anaesthetised the tourism industry. But tourism’s contribution to foreign revenue generation is swiftly returning to its former level. In Q2, the sector accounted for more than one-fourth of total export revenues, as compared with just under 24% for aluminium and related products and just under 22% for marine products. Tourism’s share will doubtless be even larger in Q3, when the numbers will show the full impact of the peak season.

The chart above also reflects favourable trends in the price of Iceland’s key goods export categories, marine products in particular. Demand for them has increased steadily as the pandemic has receded, and the sanctions on Russia have dramatically reduced the global market supply of key species such as cod. To be sure, the price of various imported inputs has surged as well, yet the trends shown in the chart reflect the fact that as an exporter of commodities and an indirect exporter of energy, Iceland is better positioned to withstand the price volatility that has shaken global markets than many of its neighbours are.

We have previously aired our opinion that a turnaround in external trade can be expected in 2022, with the current account deficit giving way to a surplus in H2. SI data accord well with this scenario, in our view. Next week the Central Bank (CBI) will publish Q2 current account figures, including the balance on primary and secondary income as well as the balance on goods and services trade. We think it clear that they data will show a sizeable current account deficit for H1/2022, as there was a hefty deficit in Q1.

By the same token, we expect a fairly handsome current account surplus in Q3. In general, the external trade situation looks set to improve, as the mainstay of output growth is shifting from domestic demand to exports. Although the surplus on goods and services trade will presumably be smaller, on average, than we were used to for most of the 2010s, prospects for trade are good, barring a marked deterioration in external conditions.


Jón Bjarki Bentsson

hief economist