In Q3, services trade generated a surplus of just over ISK 110bn, the fourth-largest surplus ever recorded by Statistics Iceland (SI). Ever since the tourism industry began mushrooming just over a decade ago, the third quarter of the year has been the most bountiful for services trade. Services exports for the period totalled ISK 263bn, while services imports totalled came to ISK 153bn. Both sides of the balance on services grew markedly year-on-year, with exports up 58% and imports up 49%.
Tourism gets a shot in the arm in Q3
The resurgence of tourism as a key export sector was the main driver of the ISK 100bn surplus on services trade in Q3. The surplus on goods and services trade combined came to ISK 39bn during the quarter. The current account will probably show a deficit in Q4, as imports have been robust in recent weeks and months.
This surge in services exports is due for the most part to a brisk summer tourist season. Exports relating to travel and passenger transport by air amounted to just over ISK 187bn. Revenues from these activities are therefore closing in on their pre-pandemic peak, which topped ISK 194bn in Q3/2018.
But Icelanders’ zeal for travel also played a major role in the outcome for the quarter. Expenditures relating to airfares and consumption abroad exceeded ISK 61bn, an all-time high in nominal terms. Trade relating to cross-border travel therefore generated a surplus of ISK 126bn.
Most other subcomponents of the services account balance generated a deficit in Q3. For instance, cross-border intellectual property usage showed a deficit of ISK 252m, although it sometimes delivers a handsome surplus, as exportation of intellectual property is a growing industry in Iceland. Various types of expert services falling under the category “Other business services” in SI’s accounts also showed a sizeable deficit in Q3. Fortunately, the hefty surplus on tourism-related services carried the day, however, making for a large overall surplus on services trade, as has often happened before in the third quarter.
Tourism homing in on first place again
The tourism industry has regained significant ground among export sectors after the pandemic-induced plunge. From October 2021 through September 2022, the sector generated ISK 411bn in total revenues, or nearly a fourth of total export revenues for the period. Over that same span of time, total revenues from marine product exports came to ISK 337bn (20% of total export revenues), aluminium and aluminium products ISK 396bn (24%), other manufacturing goods ISK 155bn (9%), and other goods and services exports ISK 377bn (23%).
It looks as though tourism is reclaiming its spot as Iceland’s largest export sector. In Q3, the sector generated just over a third of Iceland’s total foreign exchange revenues, which was roughly its share in total exports before the pandemic struck.
Surplus gives way to deficit as the days grow shorter
As we have discussed recently, Iceland’s goods account deficit has been large – and growing – over the course of 2022. According to figures from SI, it totalled ISK 71bn in Q3, which in ISK terms is the largest single-quarter deficit on record. The surplus on combined goods and services trade was therefore more meagre than it often has been during the peak tourist season. In all, goods and services trade generated a surplus of ISK 39bn during the period, whereas at its Q3/2016 peak the surplus came to nearly ISK 105bn.
When all is said and done, however, these figures from SI are somewhat more positive than we had dared hope. It seems clear that forces other than flows directly related to goods and services trade made the difference in the ISK exchange rate in Q3. From the beginning of July through the end of September, the ISK weakened by nearly 2%, even though the above-mentioned surplus was quite impressive.
On the other hand, developments in goods and services trade have probably deteriorated over the autumn, as September figures indeed indicated. A record number of Icelanders travelled overseas in October, and payment card turnover abroad hit an all-time high as well, as we have discussed recently. The same was true of goods trade in October, which generated the largest deficit ever recorded. At the same time, tourist arrivals subsided with the end of the peak season, although the autumn season was actually quite brisk for the sector. As a result, a fairly sizeable deficit can be expected in Q4.
The Central Bank is set to publish data on Iceland’s balance of payments and international investment position this coming week and will add the balance on primary and secondary income to the figures above. It will be interesting to see how these numbers and and Iceland’s external position as a whole have fared during the recent tumult in international asset markets.