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What do Icelanders expect for 2023?

Household and corporate expectations suggest that the economy will lose some steam in 2023, although pessimism does not appear to carry the day. Corporate executives and financial market participants generally assume that inflation will fall markedly, and expectations that interest rates will start to fall later in the year can be detected as well.

After a hectic 2022, it is instructive to review households’, executives’, and financial market agents’ expectations for the coming year.

Household expectations appeared to have stabilised after fluctuating widely this past year. The Gallup Consumer Confidence Index (CCI) measured just under 99 points in December, only a hair’s breadth from the 100-point threshold indicating parity between optimism and pessimism. Households’ expectations six months ahead concerning the economic and labour market situation measured just over 95 points, according to Gallup’s index calculations. This means that respondents who anticipate that the economy and labour market will be weaker at mid-year 2023 slightly outnumber those who expect an improvement. The chart below shows, however, that downbeat sentiment about the period ahead has often been far more widespread than it is now, as can be seen in the portions of yellow line below the equilibrium value.

As we have discussed recently, 2022 was probably Iceland’s most buoyant year for private consumption growth since before the financial crisis. Growth was particularly strong in several major expense categories such as overseas travel and motor vehicle purchases. The CCI often gives a reliable indication of where matters are headed in this regard, but it is also useful to examine Gallup’s quarterly big-ticket index. According to the most recent measurement, released just before Christmas, Icelanders look set to pull back on major expenditures. The most significant difference is that far fewer survey participants are planning to buy a car than in previous quarters.

On the other hand, there has been little cooling of Icelanders’ famed passion for travel, which is legendary enough to merit the more exalted term dromomania, and many are indeed planning trips abroad in the coming year. Also noteworthy is the increase in the number of consumers planning to buy a home in coming quarters, perhaps owing to expectations of increased supply and more stable prices in 2023.

Corporate sentiment clouds over

Gallup also measures expectations among executives from Iceland’s largest firms in a survey conducted for the Central Bank (CBI) and the Confederation of Icelandic Employers (SA). The most recent measurements indicate that this group has grown somewhat more downbeat, although it is certainly not drowning in pessimism. The assessment of the current economic situation is slightly below parity, after having been well above it from spring 2021 through mid-2022. In addition, executives who expect conditions to deteriorate in the coming six months outnumber those expecting an improvement.

Experience has shown that fluctuations in corporate sentiment frequently serve as a predictor of near-term developments in domestic business investment. The new Gallup measurement therefore implies that Icelandic firms will tap the brakes rather than hit the gas pedal – or at least lift their foot off the gas a bit. The CBI’s recent survey of firms’ investment plans, published in Monetary Bulletin, tells the same story.

In sum, it can therefore be said that these newest measurements of corporate and household expectations fall well into line with our forecast for 2023, published this past September, in which we project weak private consumption growth and a contraction in business investment this coming year.

Widespread expectations of lower inflation and interest rates

After a year of spiking inflation and surging interest rates, it is intriguing to see what Icelanders envision for 2023. As usual, households stand out from the crowd somewhat in this respect. As the chart indicates, households’ inflation expectations one year ahead are determined primarily by observed inflation at any given time. It therefore comes as no surprise that Gallup’s most recent measurements should show that households expect inflation to average 8% in Q4/2023.

Corporate executives and financial market participants are noticeably more optimistic about inflation in the year ahead, both groups expecting it to measure around 5% in one year’s time. It just so happens that our most recent inflation forecast is along those same lines, as we consider it likely that both import prices and house prices will generate far less upward pressure on the CPI in 2023 than they did in 2022.

Expectations about the coming year’s developments in the policy rate are more opaque; however, the results are in from the CBI’s recent market expectations survey, conducted just before the bank’s policy rate decision in late November. It should be noted that only after the survey was carried out did it come to light that the CBI had not yet closed the book on monetary tightening.

However, survey participants indicated that they expected the policy rate to remain unchanged until mid-2023 and then start to fall gradually thereafter. For the sake of comparison, the chart also shows our most recent policy rate forecast. As market agents do, we think it highly likely that the CBI will end its monetary tightening phase with the close of 2022 and then start easing rates later in 2023. But of pivotal importance in this context are developments in inflation, asset markets, and the economy more generally. As is discussed above, available indicators uniformly suggest widespread expectations of slower growth and declining inflation in the coming year.


Jón Bjarki Bentsson

chief economist