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Trade account still in deficit, but better times lie ahead

Iceland recorded a deficit of ISK 25bn on combined goods and services trade in Q1/2022, but tourism-generated revenues are starting to rise again after the COVID-induced slump. The outlook is for the trade deficit to flip to a surplus this year, with a current account surplus to take hold in the years to follow.

Iceland’s services account balance was negative by ISK 5.4bn in Q1/2022, only the second deficit on services trade since the beginning of 2009. Iceland’s first services account deficit, measuring ISK 8.3bn, was recorded in Q1/2021. Services exports totalled ISK 112.9bn during the quarter, a year-on-year rise of some 90%. This was offset by Icelanders’ purchases of services abroad in the amount of ISK 118.3bn, a YoY increase of 75%.

As has generally been the case in the past decade or so, transport, travel, and cross-border shipping delivered a handsome surplus. The surplus on transport- and transit-related trade came to nearly ISK 10bn, while the surplus on travel-related trade was just under ISK 8bn. This was offset by a deficit of nearly ISK 15bn on services trade classified by Statistics Iceland (SI) as “Other business services”, which includes research and development, technological services, and miscellaneous specialist and consulting services. There was also a sizeable deficit on culture and recreation and on computer-related services. Furthermore, there was only a marginal surplus on intellectual property usage fees, which have been highly volatile in recent years, as the chart shows.

Revenues from tourists have rebounded strongly since COVID-19’s dampening impact on travel began to subside in 2021. Total revenues from foreign visitors came to just over ISK 52bn in Q1, only slightly less than in Q4/2021. The decline of the pandemic has also revitalised Icelanders’ appetite for travel, however, and spending on overseas travel totalled over ISK 36bn in Q1. Trade relating to cross-border travel therefore generated a surplus of approximately ISK 16bn during the period.

On the whole, the deficit on goods and services trade totalled ISK 25.4bn in the first three months of this year. As is mentioned above, goods and services trade generated deficits of ISK 20bn and just over ISK 5bn, respectively. The trade deficit for the quarter was similar to that in Q1/2021, but during the years beforehand, the services account surplus had always offset the goods account deficit in the first quarter of the year – and often with room to spare, as the chart indicates.

Tourism gaining steam

Before the pandemic struck, tourism had established itself as Iceland’s largest export sector, generating some 35% of Iceland’s total export revenues in 2019, about the same as the fishing and aluminium industries combined. Tourism revenues then collapsed with the onset of the pandemic, and goods exports regained the lead as Iceland’s main source of foreign exchange revenues. In the recent past, tourism has been picking up strongly, and in Q1/2022 it accounted for 15% of total export revenues, although fishing (24%) and aluminium (26%) carried far more weight during the quarter.

Other services exports should not be forgotten, though, as exports of non-tourism services accounted for 17% of total exports in Q1. This category includes various services relating to R&D, technology, transport, and intellectual property use, as well as financial services. Revenues from such services exports have grown steadily in recent years, and by now they account for a sizeable chunk of FX revenue generation in Iceland.

2022 a turning point in external trade

Our recent macroeconomic forecast explores developments in the current account and the outlook for the coming term. The balance on goods and services trade plays the leading role in this analysis. Iceland’s current account deficit totalled 2.8% of GDP in 2021, the first deficit in nine years. In 2022 and the years to follow, however, the outlook is positive. Actually, this year can be divided into two parts as regards the current account balance. It appears that H1 will be dominated by a deficit, which will flip to a surplus in H2. In large part, this is due to growing tourism revenues, although increased revenues from aquaculture, pelagic fishing, silicon metals manufacturing, and various labour-intensive services will contribute as well. It can be said that the recovery of the current account balance goes hand-in-hand with the shift from domestic demand to exports as the main driver of GDP growth.

We project that total goods and services trade will be broadly in balance in 2022 and then generate a surplus of ISK 70-80bn per year in 2023 and 2024. The outlook is therefore quite favourable for external trade, even though the pandemic and its side effects plunged Iceland’s current account balance temporarily into negative territory.


Jón Bjarki Bentsson

Chief economist