Turnaround in goods trade

The hefty goods account deficit in March is probably due in large part to a temporary downturn in exports. On the other hand, goods trade data from the recent past sketch out a fairly clear picture of the business cycle, with a contraction in both imports and exports taking over from a period of rapid growth. There are signs of a contraction in some types of private consumption and investment in Q1/2024.

According to newly published figures from Statistics Iceland (SI), the balance on goods trade was negative by just over ISK 33bn in March. This deficit, Iceland’s largest since October 2023, is due primarily to unusually weak goods exports during the month. In all, goods were exported for just over ISK 64bn in March, which translates to a 28% contraction year-on-year in ISK terms. At the same time, goods imports totalled almost ISK 98bn, a YoY contraction of 17% in ISK terms.

Virtually all key categories of exports contracted: marine product exports totalled ISK 23bn in March 2024, a contraction of a third; aluminium exports came to ISK 22bn, contracting by 28%; and farmed fish exports, at ISK 3bn, were down by half.

The ISK was a scant 1 percentage point stronger in March 2024 than in the same month of 2023, so the exchange rate accounts for only a small part of the change. Aluminium prices were also somewhat lower this March than they were a year ago, but again, the difference is not large enough to explain the contraction. Presumably, the Easter holidays have a part to play, as they fell almost entirely within the month of March this year, while last year they came in April. Moreover, aluminium exports fluctuate from month to month, depending on shipping schedules. Wintertime energy rationing to the aluminium smelters may make a difference as well.

A similar tale can be told of developments in marine product exports. In exchange rate-adjusted terms, the price of marine products as captured by the marine product price index was 2% lower in the first few months of 2024 than at the same time a year earlier. This is compounded by this season’s capelin catch failure and the very small volume of capelin exported in February and March, as well as the downward revision of catch quotas for saithe and Greenland halibut, although these were offset by an increase in the haddock quota and a slight jump in the quota for cod.

Goods trade follows the business cycle

In a small open economy like Iceland, goods trade figures can provide considerable insight into economic activity more broadly. For instance, in the recent term, the business cycle is reflected clearly in developments in goods imports and exports. After a period of rapid growth [ATH: growth in what, exactly?] from spring 2021 until very late in 2022, the growth rate slowed markedly about a year ago, and in H2/2023, both imports and exports of goods contracted sharply at constant exchange rates.

In Q1/2024, exports contracted by nearly 7% and imports by just over 2% YoY, also at constant exchange rates. On the exports side, this contraction reflects in part the smaller saithe and Greenland halibut quotas and the capelin catch failure, which reduce fishing industry export revenues, as does the slight YoY decline in the price of marine products and aluminium. Marine product exports shrank by nearly 7% YoY by this measure, and aluminium prices by nearly 15%. It is positive, though, to see a YoY increase of more than 75% in exports of pharmaceuticals and medical equipment. As is well known, these sectors have been growing in Iceland, and actually, they indicate to a large extent the exportation of brainpower and utilisation of human resources.

On the imports side, passenger car imports shrank by half YoY in Q1 at constant exchange rates. This accords with the contraction of over 60% YoY in new motor vehicle registrations according to recent figures from Bílgreinasambandið (BGS), the umbrella organisation representing companies engaged in the sale and service of motor vehicles. Furthermore, imports of fuels and oils shrank 15% YoY, owing partly to energy switching among car owners, but probably to reduced overall activity as well. Moreover, there was a sizeable contraction in imports of semi-durables (such as clothing and the like) by this measure, and on the whole, imports of consumer goods grew by only a percentage point YoY in Q1.

These figures tell us that goods trade was probably a bit of a drag on GDP growth during the quarter and that the current account may well have been in deficit in Q1, as it was in Q4/2023. The data on imports also imply a cooling economy, at least as regards private consumption and investment. In our late-January forecast, we projected that GDP growth would gradually pick up later this year but that the overall growth rate for 2024 would be below 2%. We cannot but conclude that this forecast is supported by the figures above, as well as other recent statistics.


Jón Bjarki Bentsson

Chief economist