As is often the case at this time of year, British travellers were the largest nationality group during the month, accounting for nearly 21% of the total. The US was in second place (19%), followed by Germany (6%), the Netherlands (5%), and China (4%). Chinese visitors have increased in number again, after having all but disappeared from Iceland during and just after the pandemic. The Nordic countries combined accounted for just under 4% of the January total.

Are revenues per tourist contracting?

Visitor numbers alone do not tell the whole story about tourism activity, of course. Of no lesser importance is how long tourists stay in Iceland, on average, and how much revenue each visitor generates. Various tourism operators have been concerned recently about the apparent decline in the average length of stay and the possibility of a drop in value creation per tourist. That being the case, it is instructive to compare developments in tourist numbers with other related economic variables, such as foreign payment card turnover within Iceland and the number of bed-nights in guest accommodation. For the purposes of this comparison, we have omitted 2020 and 2021, which were outliers because of the pandemic.

Statistics Iceland’s (SI) bed-night data extend through year-end 2023. As the chart indicates, foreign visitors’ length of stay is always subject to seasonal fluctuations, with longer stays in the summer than in the winter. If we compare November and December 2023 with [the same period in] 2022, 2019, and 2018, we find an average of 2.6 bed-nights per tourist in these two months of 2023, as compared with 2.9 in 2022, 3.2 in 2019, and 2.8 in 2018. This simple calculation therefore lends support to the concerns mentioned above.

It is also illustrative to compare foreign payment card turnover within Iceland to the number of visitors in the country. In this case, however, it is important to remember that a portion of this foreign turnover could be due to e-commerce from abroad. Furthermore, some Icelanders have payment cards issued by foreign financial institutions.

But despite these caveats, foreign card turnover and bed-nights have developed quite similarly in the recent term. Card turnover figures also fluctuate with the seasons, even when adjusted for tourist numbers at any given time. For instance, turnover from use of foreign payment cards in Iceland averaged ISK 147,000 per tourist in Q3/2023. The same average for the last two months of the year was ISK 110,000, and for January 2024 it was ISK 119,000 per tourist.

Comparing these figures is complicated somewhat by price and exchange rate movements, of course, which does not apply to bed-nights. Nevertheless, it is worth noting that card turnover per tourist averaged ISK 130,000 in November and December 2022, ISK 103,000 in the same months of 2019, and ISK 105,000 in 2018. It is therefore clear that in price-adjusted terms, the proportional drop in card turnover between November-December 2022 and 2023 is even larger than the 15% nominal decline.

Although we must bear in mind the above-mentioned reservations about how literally these data can be interpreted, they do suggest that foreign tourists are currently clutching their wallets a little tighter while in Iceland than they did a year ago. If this trend continues, it could change the relationship between revenue growth and increased visitor numbers in the tourism sector in coming quarters.

What if tourism industry revenues do not increase this year?

Among the topics we discuss in our newly published macroeconomic forecast are developments and prospects for tourism. As we expected, tourism grew unabated throughout 2023, late-year earthquakes and imminent eruptions notwithstanding. More than 2.2 million tourists came to Iceland via Keflavík Airport during the year, making 2023 the second-strongest year on record. Added to this total are cruise ship passengers and those who travelled on the Smyril Line ferry.

The tourism industry looks set to keep growing in the coming term. Leading indicators such as airport gate allocations and bookings suggest that 2024 will set a new record for tourist numbers. In all, we expect over 2.4 million tourist arrivals this year. In the years to follow, we project a continued increase, albeit at a slower pace. We expect nearly 2.6 million tourists in 2025 and more than 2.7 million in 2026.

The tourism industry will deliver the lion’s share of this year’s projected export growth, according to our macroeconomic forecast. In view of news reports about a possible setback in bookings and concerns about declining revenues per tourist, it is helpful to examine how the Icelandic economy would be affected if growth in tourism were flat in 2024 – due to stagnating visitor numbers, declining revenues per tourist, or a combination of the two.

A simple scenario analysis wherein we hold tourism revenues constant between 2023 and 2024 reveals that export growth would shrink from 2.9% to 0.2%. On the other hand, import growth would weaken because of a reduced need for tourism industry inputs, as well as somewhat more sluggish private consumption growth. The current account balance would therefore deteriorate: instead of showing a surplus measuring 0.7% of GDP in 2024, it would be close to zero, as we estimate for 2023. As a result, the ISK would probably appreciate less in 2024 than we assume in our baseline forecast. GDP would be accordingly weaker, at 1.1% instead of the projected 1.9% in our baseline scenario.

Such a turn of events would significantly affect the labour market as well. We estimate that each 100,000 tourists who visit Iceland create perhaps 700-800 jobs, directly and indirectly. This rough estimate implies that the projected increase in 2024 – 200,000 more tourist arrivals than in 2023 – will create around 1,400-1,600 jobs in Iceland, all else being equal. If the sector does not grow because of stagnating visitor numbers, reduced revenues per tourist, or both, the supply of jobs in the labour market will be considerably below our baseline forecast. Presumably, this would impede net inward migration, as the booming population growth of the past two years has been driven mainly by immigration among job-seekers from other countries. By the same token, demand pressures in the housing market would be weaker, owing to slower population growth and reduced tourist demand for short-term rental housing.

The economy could cool earlier

Although a less pronounced ISK appreciation could slow down disinflation, inflation would probably be affected more strongly in coming quarters by reduced demand for jobs and housing and weaker growth in the economy as a whole. As a result, inflation could subside somewhat more quickly, and the policy rate could fall farther than we have assumed in our baseline forecast. This aligns with the opinions expressed by Central Bank (CBI) representatives at the press conference following the last interest rate decision. When asked, the CBI officials said that headwinds in the tourism industry could cause the economy to cool earlier than would otherwise be the case, reducing the need for a tight monetary stance in the near future.

It is still too early to determine whether our baseline forecast or the above-described alternative scenario will turn out more accurate. But in any event, it is clear that the ongoing geological unrest on Reykjanes is not the same springboard for tourism as the “tourist eruptions” of the past few years seem to have been. Whether this changes again, only time will tell.