According to newly published figures from Statistics Iceland (SI), the surplus on external services trade totalled ISK 24bn in Q4 2022, with travel- and transport-related subcomponents delivering handsome surpluses during the period, as they often do, and most other categories of services trade generating minor deficits. It is a story Iceland knows well. What complicates the overall picture somewhat, however, is that according to SI’s press release, the treatment of data on trade due to intellectual property usage is under review, and those transactions will not be included in year-2022 external trade data until the review is complete. Presumably, this can be seen in the surplus on such trade, which is often quite generous in the last quarter of the year (shown in yellow in the bar graph below) but was very small in Q4/2022.
Year-2022 trade deficit ISK 54bn
Despite a hefty surplus on services trade – thanks mainly to tourism – Iceland’s balance on combined goods and services trade showed a large deficit in 2022. The game-changer was the rapidly growing goods account deficit, which soared to a record level in Q4. The outlook for 2023 is quite a bit better, and the summer tourist season will be an important determinant of the outcome for the year.
Revenues from tourism always make a strong impact on the balance on services, and they do so in the new figures as well. In all, export revenues from travel and passenger transport by air totalled just over ISK 81bn in Q4/2022. These were offset by ISK 57bn in expenditures relating to Icelanders’ travel abroad during the quarter, including the record-breaking month of October, which we have reported on previously. The surplus on items relating to cross-border travel was therefore ISK 39bn, which in ISK terms is broadly in line with the total from Q4/2019, the last quarter before the pandemic laid waste to the global economy.
Tourism rebounded strongly in 2022
SI also published overall figures on goods and services trade through end-2022 this morning. On the exports side, the numbers show that tourism has resumed its previous role as one of Iceland’s leading export sectors. Last year, revenues from foreign tourists came to ISK 448bn, over one-fourth of total export revenues. The fishing industry generated ISK 349bn in gross export revenues (21% of the total), and aluminium exports ISK 403bn (22%). When comparing these figures, however, it is important to remember two things: first, that different sectors may require vastly differing amounts of imported inputs, and second, that company ownership is an important determinant of how much value any given sector generates for the Icelandic economy.
Services account surplus outweighed by record-busting goods account deficit
The overall picture of external trade in 2022 is growing ever clearer. Data on primary and secondary income in Q4/2022 are still lacking but will be published by the Central Bank next week.
But it has been established that the deficit on combined goods and services trade came to ISK 54bn for 2022 as a whole. As the chart shows, the goods account balance deteriorated swiftly as the year advanced, generating an all-time record deficit (in ISK terms) of ISK 214bn for the full year. It was partially offset by a services account surplus of just over ISK 160bn, and while this figure is nothing to sneer at, it is well below the pre-pandemic average of ISK 264bn for 2016-2019.
External trade affected the ISK exchange rate
Developments in external trade have doubtless had a major impact on the ISK exchange rate in the recent term. The ISK appreciated more or less uninterrupted from autumn 2020 through mid-2022, a period featuring a reasonable balance in external goods and services trade despite the doldrums in the tourism industry.
Expectations of a further improvement probably caused the ISK to continue appreciating well into 2022. But in H2/2022, the ISK weakened noticeably, at a time when the current account deficit was growing apace.
There is some comfort to be taken in the most recent figures, though, which indicate that a better balance is in the offing. For example, the balance on goods and services trade showed a marginal surplus in December, after wide deficits in the months beforehand. Furthermore, goods trade data and services trade indicators (such as tourist arrivals) suggest that this January was a relatively well balanced month. In our most recent macroeconomic forecast, we projected this year’s trade deficit at just under a percentage point of GDP, or about ISK 40bn. That deficit will probably be concentrated in H1, with developments in H2 pulling in the opposite direction, particularly if the upcoming summer tourist season lives up to current expectations. Such an outcome should support the ISK further ahead.