Springtime uptick in household consumption

Private consumption appears to have blossomed somewhat this spring, according to payment card turnover figures. Even so, private consumption growth for the year as a whole will be relatively modest, as near-term economic conditions are less favourable now than in the past few years.


Payment card turnover totalled just over ISK 93bn in May, a year-on-year increase of 5.0% in nominal terms. The real increase — i.e., adjusted for price level and exchange rate movements — measured only 1.1% YoY, however. Developments in card turnover within Iceland and overseas diverged widely. Turnover at home grew by a good 2% YoY in real terms, whereas turnover abroad contracted by 3.5%.

Icelanders’ card use abroad has changed radically. Just over a year ago, it was growing at double-digit rates in YoY terms, whereas more recently it has grown and contracted by turns. For comparison, in the first five months of 2019, Icelanders’ departures via Keflavík Airport declined by nearly 4% YoY, whereas in 2018 as a whole, they increased by nearly 8% relative to 2017. But overseas payment card turnover is affected by other factors as well — in particular, online shopping with international merchants, which has probably had a major impact on the link between these variables in recent years.

Private consumption growth set to ease

Payment card turnover is one of the most useful domestic indicators of developments in private consumption, owing to widespread card use in Iceland and the relative rapidity with which data are received. Card turnover numbers for May suggest an uptick in consumption spending this spring. In April and May combined, turnover increased by 1.8% YoY in real terms, as compared with 0.8% in Q1. This lines up well with developments in household sentiment as measured by the Gallup Consumer Confidence Index, which averaged nearly 14 points higher in April and May than in Q4/2018. The jump in the index may reflect households’ response to reduced uncertainty after the fall of WOW Air in March and the finalisation of wage agreements in April, even though WOW’s collapse was anything but good news.

Nevertheless, we expect private consumption growth to be weaker this year, owing to slower population growth, rising unemployment, modest real wage gains, and reduced household expectations vis-à-vis developments and prospects for the economy and the labour market. In our new macroeconomic forecast, we project 2019 private consumption growth at 2.2%, the weakest growth rate since 2013. It is worth bearing in mind that in general, Icelandic households’ financial position has improved markedly in recent years, and a period of sluggish private consumption growth need not be interpreted as a sign of hard times for most Icelanders, even though they may be less inclined to spend than in the past several years.

Author


Jón Bjarki Bentsson


Chief economist

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