Services account surplus shrinks in Q2

New services trade figures from Statistics Iceland (SI) and other recent tourism-related statistics suggest that the sector’s growth rate has eased in the recent past. This year’s current account surplus will probably be smaller than last year's, and this plays a part in the divergent developments in the ISK exchange rate between the two years. 

The surplus on services trade measured ISK 60bn in Q2, about ISK 5bn less than in Q2/2016, owing both to a surge in tourism-related services imports and a contraction in non-tourism services exports. In ISK terms, travel-related services imports (which reflect Icelanders’ consumption while travelling abroad) increased by 19% year-on-year in Q2. In real terms (adjusted for the ISK appreciation over the period), the increase was considerably greater. On the other hand, there was a marked contraction between years in items such as exported computer-related services, intellectual property usage fees, and other trade-related services. These figures probably reflect the impact of a high real exchange rate, which erodes exporters’ competitive position and encourages Icelanders to travel abroad. 

Travel-related services exports grew by over 9% YoY in ISK terms in Q2. At only one-third of the growth rate measured in Q1, this is a sign of how much seasonal fluctuations in the tourism industry have smoothed out, with off-peak growth far outpacing growth during the summer months. 

Tourism-generated revenue growth eases

In the first half of the year, the services account surplus measured ISK 101bn, an increase of ISK 8bn YoY. As is mentioned above, this robust growth is largely due to a surge in tourism-related services exports in Q1. 

Most statistics and other indications from the tourism industry in the past few months suggest that the recent boom has begun to cool off. In addition to the figures mentioned above, SI released numbers yesterday on overnight stays and guest arrivals through July. As the chart above indicates, the rise in the number of bed-nights at year-round hotels has subsided steadily in the recent term, after growing rapidly in the previous quarters. These figures only cover a portion of the accommodation available to foreign visitors,. but nevertheless, we think they give a fairly clear picture of developments in the sector, as they accord well with the services trade figures above. 

Current account surplus set to be smaller this year

Figure for two of the three key components of the current account balance for H1/2017 have now been released. On a balance of payments basis, the goods account deficit totalled just under ISK 46bn in Q2/2017. The surplus on combined goods and services trade was therefore approximately ISK 15bn for the quarter, some ISK 10bn less than over the same period in 2016. The surplus for the first half of 2017 was just over ISK 20bn, as opposed to over ISK 27bn in H1/2016. The trade surplus has therefore shrunk somewhat YoY, and this is probably a factor in the changed behaviour of the ISK between the two years. 

The Central Bank (CBI) is scheduled to publish figures on Iceland’s Q2/2017 balance of payments and external position later today. It will be interesting to see how Iceland’s current account balance develops based on those figures. In our macroeconomic forecast from July, we projected that the current account surplus would moderate to 5% of GDP this year, or about ISK 125bn. The current numbers are broadly in line with that forecast, although the surplus could turn out somewhat smaller when all is said and done.