Sunny June weather leaves consumer sentiment unaffected

The spectacular weather in June has not brightened Icelanders’ attitudes towards the economy and the labour market, according to the newest Gallup Consumer Confidence Index (CCI) measurement.


The index fell by 13.6 points month-on-month, to its lowest in 2019 to date. Nearly all of the decline is due to a steep drop in expectations about the labour market and the overall economic situation six months ahead. That sub-index fell between months from 75 points to 52, which means that most respondents expect the situation to be worse half a year from now than it is currently. Consumers’ assessment of the current economic and labour market situation are broadly unchanged, however, at just over 127 points, indicating that a majority of survey participants consider the current situation good.

Uptick in house purchase plans

Gallup has also published its most recent quarterly “big-ticket” index of consumers’ major purchase plans. The big-ticket index rose by 1 point between quarters and is now up 2 points year-on-year. Therefore, households in general are not ruling out major consumption decisions such as buying a car, a trip abroad, or a home.

About 15% of respondents consider it likely or very likely that they will buy a car in coming quarters. The car purchase component is up 2 points YoY, to 27, yet while there is considerable interest in car purchases, new vehicle registrations have declined steeply in recent quarters. That said, the number of new registrations in Q1 was about the same as in the same quarter of 2016.

Icelanders’ wanderlust appears to have waned somewhat, according to the overseas travel component of the index. This sub-index now measures just under 160 points, 2 points lower than it was a year ago. But this may have to do with dismal weather in June 2018, which probably prompted many consumers to book flights to points south.

But the big news in the major purchase index is the house purchase component, which has jumped above 14 points, from less than 9 points a year ago.About 8% of respondents plan to buy a home in the near future, the largest share since the infamous year 2007. If these survey responses materialise into actual purchases, the housing market may well see brisk activity in coming quarters.

Private consumption more robust this spring than previously thought?

The CCI and the big-ticket index combined give interesting indications of potential developments in private consumption. Although the June CCI measurement reflects growing pessimism among Icelandic households, the Q2 average was virtually the same as the Q1 average. Payment card turnover data paint a similar picture of H1/2019 developments. As the Central Bank (CBI) Monetary Policy Committee (MPC) noted in this week’s statement announcing the policy rate decision, private consumption growth may still be more resilient than many expected after WOW Air’s collapse and the ensuing deterioration of the labour market outlook. But we believe Icelanders’ consumption zeal will eventually yield and that households will by and large curb their spending in the second half of the year.

Author


Jón Bjarki Bentsson


Chief economist

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