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Springtime surge in GDP growth driven by buoyant consumption and rising tourist numbers

Strong private consumption growth and a rapid rise in tourist arrivals explain the lion’s share of GDP growth in 2022 to date. Exports look set to take over from domestic demand as the main driver of growth in the quarters to come. The outlook is for GDP growth to measure 5% this year and then about half that much in both 2023 and 2024.

According to newly published figures from Statistics Iceland (SI), GDP growth measured 6.1% in Q2/2022. It was driven mainly by strong private consumption growth and a year-on-year surge in tourist visits to Iceland. General business investment grew as well, although it was offset by strong import growth and far less investment in aircraft than over the same period in 2021. The pace of growth in Q2 was similar to that in recent quarters, after the economy began to pick up as the effects of the pandemic tapered off.

Private consumption takes flight

Private consumption grew by 13.5% YoY in real terms, the strongest pace seen in 17 years. It is even more interesting in view of the fact that private consumption had already firmed up decisively last year. As compared with the same period in 2019, the last year before the pandemic, private consumption in 2022 was a full 13% stronger. Clearly, households have shaken off the contraction brought on by the pandemic: payment card turnover, passenger departures via Keflavík Airport, and data on imports all bear witness to Icelanders’ brisk consumption spending this spring, particularly overseas.

In general, households are very strong financially at present, but many of them can be expected to hit the brakes fairly hard on their consumption spending in the near future, prompted by sky-high inflation, sinking expectations about the near-term situation, and uncertainty about this winter’s wage negotiations, to mention just a few factors.

Surge in tourism underpins export growth

Exports stood shoulder-to-shoulder with private consumption as the linchpin of GDP growth in H1/2022. Services exports have been growing especially rapidly, as tourists are once again flocking to Iceland. In all, exports grew by over 23% in H1, and as the chart indicates, nearly all of that growth is attributable to services. Unlike in Q1, exports outpaced imports in Q2, and the contribution of net trade to output growth was therefore positive for the first time since Q3/2021.

In comparison with the pre-pandemic period, however, services exports were 7% weaker in real terms, while goods exports were broadly the same as in Q2/2019. Nevertheless, based on currently available data and the outlook for the weeks to come, Q3 services exports could catch up with 2019, as tourism is booming at the moment.

Investment growth softens

Investment grew by just over 6% YoY in H1/2022, driven mainly by 12% growth in business investment during the period. Public investment grew as well, by nearly 4%. On the other hand, residential investment shrank more than 7% YoY during the half. Naturally, this contraction showed in limited supply of new homes on the market and rapidly rising house prices in H1. SI warns, however, that the aforementioned residential investment figures are unusually uncertain.

Fortunately, there are signs that residential investment is picking up. The outlook is for a rebound in coming quarters, with a steady increase in the number of new homes put on the market – and not a moment too soon, either.

Slower GDP growth in the offing

The domestic economy righted itself admirably once the worst of the COVID shock had passed. SI data have now shown continuous positive output growth for five quarters in a row, bringing GDP back near its pre-pandemic level. SI released revised GDP figures for recent years alongside this morning’s publication. With that revision, the contraction in 2020 proved smaller previously estimated (6.8% instead of 7.1%), and year-2021 growth was 4.4% instead of the previous 4.3%.

This morning’s figures fall well into line with the picture we painted in our macroeconomic forecast from May. We expect demand growth in the economy to taper off as exports continue to grow apace. The backbone of output growth will therefore shift steadily from demand to exports in the coming term. We expect GDP to grow by an average of 5.0% in 2022, followed by 2.7% in 2023 and 2.6% in 2024. If these projections are borne out, Icelanders can be well satisfied, given the growing probability of an economic contraction in many neighbouring countries in the quarters to come.


Jón Bjarki Bentsson

Chief economist