Balance on services improved during pandemic summer reprieve

A sizeable services account surplus, stemming mainly from a spike in tourist arrivals over the summer, pulled strongly against the unfavourable goods account balance in Q3. The balance on services has moved broadly in line with developments in the pandemic and associated public health measures and will continue to do so. It is quite likely that the current account surplus will grow swiftly once tourism recovers.

Newly published figures from Statistics Iceland (SI) show a deficit of nearly ISK 14bn on combined goods and services trade in Q3. The deficit is due to the balance on goods, which was negative by ISK 34bn, the largest deficit since Q3/2019, and the deficit on goods trade is due mainly to strong imports of commodities, operational inputs, fuels, and consumer goods during the quarter. It was offset by a more than ISK 20bn surplus on services trade, however. The deficit on combined goods and services trade narrowed somewhat between quarters, even though the goods account balance deteriorated.

Tourists generated considerable revenues this summer, in spite of everything

The brief respite from the pandemic and related border restrictions during the summer proved bountiful in terms of foreign exchange revenues. As the chart indicates, the services account surplus in Q3 was due entirely to net positive exports of travel and transport services. This represents a turnaround from Q2, when services related to overseas travel generated a deficit of just over ISK 2bn. Although some Icelanders took advantage of the COVID respite to travel abroad, the modest influx of tourists visiting Iceland weighed much heavier. In all, about 109,000 foreign travellers came to the country in July and August combined, as opposed to 121,000 in January.

A month-by-month examination of the trade balance shows even more clearly how closely aligned it has been with the path of the pandemic and related public health measures. It shows, for instance, that the services account surplus surged in July, sagged in August, and then disappeared altogether in September, with the resurgence of the pandemic and the reinstatement of tighter border restrictions.

Services revenues contract; a weaker ISK supports goods exports

Iceland’s export revenues have shrunk rapidly since the Corona Crisis struck this past winter. The contraction in ISK terms is due for the most past to reduced tourism-generated revenues, as the weaker ISK has largely offset reduced volumes and/or less favourable prices of other exports. For example, despite a more than 8% contraction in marine product export volumes and a decline in international market prices, Iceland’s marine product export revenues were virtually unchanged year-on-year in the first nine months of 2020. A similar trend can be seen in exports of other goods – apart from aluminium products, whose export value fell by 4% YoY in ISK terms over the same nine-month period.

Temporary setback in external trade

Clearly, 2020 is on track to be Iceland’s weakest year for goods and services trade since the financial crisis just over a decade ago. Even so, given how big a blow the COVID-19 pandemic has dealt to Icelandic exports, developments have been rather more favourable than we had feared. This is due not least to how strongly imports have contracted, as Icelanders have shifted their consumption spending to domestic goods and services. In 2020 to date, the deficit on goods and services trade totals just over ISK 30bn. The outlook is also for a deficit in Q4. All this notwithstanding, we expect the outcome for the year as a whole to be more favourable than the more than ISK 60bn trade deficit we forecast back in September.

In addition, prospects for external trade have brightened in the past few weeks, with positive news about vaccine candidates. The trade balance is likely to return quickly to surplus once tourism regains its footing. In our macroeconomic forecast from September, we projected that about 800,000 tourists would visit Iceland in 2021, about the same as in 2013. We think that total would suffice to deliver a modest surplus on goods and services trade for the year, even allowing for growth in imports. If the summer 2021 tourist season turns out livelier than we have projected, the trade surplus – and net foreign currency inflows – will accumulate quickly.


Jón Bjarki Bentsson

Chief economist