H1 current account surplus shrinks markedly year-on-year in 2017
The current account (CA) surplus for the first half of the year was only about half the size of last year’s H1 surplus. Iceland’s international investment position (IIP) deteriorated somewhat in Q2 and was negative by 2.5% of GDP at mid-year. The smaller CA surplus is one reason why the ISK has behaved differently this year than it did in 2016, and the surplus for 2017 as a whole can be expected to be considerably smaller than last year’s. The balance is expected to remain positive in the coming term, however.
According to newly published figures from the Central Bank of Iceland (CBI), the current account balance was positive by ISK 16.3bn in Q2/2017, about half the size of the surplus for the same quarter in 2016. The balance on services was positive by ISK 60bn in Q2, while the balance on goods was negative by nearly ISK 46bn over the same period. The balance on primary income, which largely reflects cross-border financial income and expense, turned out positive in the amount of ISK 6.8bn. Secondary income was negative in the amount of ISK 5.1bn during the quarter, and the capital account balance was negative by ISK 0.3bn.
Surplus halved in H1
The CA surplus for H1/2017 totalled just under ISK 24.5bn, as opposed to ISK 46.7bn in H1/2016, a YoY reduction of about half and the smallest H1 surplus since 2014. The YoY decline is due to a growing deficit on goods trade, a smaller surplus on primary income, and more negative secondary income. This is offset by the increasing surplus on services trade, which has nevertheless grown much less strongly between years than could have been expected given the rise in tourist numbers. This stems from a number of factors: a marked decline in spending per tourist in ISK terms, a contraction in non-tourism services exports, and an increase in Icelanders’ spending abroad.
A slight deterioration in net external debt
The IIP was negative by ISK 62bn at the end of June 2017, or 2.5% of estimated GDP for the year. External assets totalled ISK 3,494bn and external liabilities ISK 3,556bn. The deterioration in the IIP (which was positive by ISK 80bn at the end of Q1) is due primarily to valuation changes in external assets, which were more negative than valuation changes in external liabilities. It should be borne in mind, however, that the IIP is still more favourable than it has been for the past half-century, showing how much stronger the economy is in this respect than it has been in recent decades.
Outlook for shrinking CA surplus
The outlook is for a considerably smaller CA surplus this year than in 2016. In 2016, the surplus measured almost ISK 190bn, or 7.8% of GDP, according to figures from the CBI. According to ÍSB Research’s macroeconomic forecast from July, the CA surplus for 2017 is estimated at 4.8% of GDP, and the aforementioned CBI figures appear well in line with that forecast. Q3 figures will shed more light on developments, however, as most of the surplus on services trade falls in that quarter. We forecast the CA surplus at 4.1% of GDP in 2018 and 3.6% in 2019.