GDP growth below expectations in H1

GDP growth in Iceland was more modest in H1 than in previous quarters, owing mainly to weaker growth in business investment and services exports. Year-2016 growth figures have been revised upwards, however, and it now appears clear that the business cycle peaked last year. 

GDP growth measured 4.3% year-on-year in the first half of 2017, according to newly published figures from Statistics Iceland (SI). This is broadly similar to the H1/2016 growth rate but well below that for 2016 as a whole. H1/2017 GDP growth is somewhat below most forecasts for the year, owing mainly to weaker growth in investment and exports. On the other hand, imports also grew somewhat less than anticipated. 

Robust private consumption growth

Private consumption grew 8.3% YoY in H1/2017. It was particularly strong in Q2, at 9.5% YoY, the fastest rate of growth since Q4/2007. It appears as though Icelanders have taken full advantage of the high real exchange rate, buying consumer durables and travelling abroad more frequently, as can be seen in payment card turnover figures and other recent indicators.

Business investment growth eases

Business investment grew by 5.2% YoY in H1/2017, much less than we had expected. The growth that did occur stemmed primarily from residential investment, which was up 28.6% in H1 after a surge starting in the second half of 2016 and appears to be growing rapidly still. Business investment grew by 1.3% over the same period, and public investment by 5.6%. This tepid growth in business investment is noteworthy. Excluding investment in ships and aircraft, the increase in business investment measured 8.5%, while total investment growth measured 11.5% YoY. 

Weaker export growth

Exports grew by 6.4% YoY in H1/2017, goods exports by 1.5% and services exports by 12.2%. Imports grew by 10% over the same period, goods imports by 5.4% and services imports by 18.9%. The contribution of net trade to GDP growth was therefore negative during the half. The figures on real growth in services exports accord with other recent statistics, and all of them indicate that the tourist head count doesn’t tell the whole story concerning YoY growth in tourism. It is obvious that, in comparison with last year, each tourist now spends considerably less in ISK terms while staying in Iceland.

GDP growth peaked in 2016

SI has also published revised GDP figures for recent years. GDP grew by 7.4% in real terms in 2016 and is now 11% stronger than in 2008. Private consumption and investment account for the lion’s share of GDP growth, with domestic demand up by 8.9%. Private consumption grew by 7.1% (the fastest annual rate of private consumption growth since 2005), public consumption by 1.9%, and investment by 22.8%. 

It should be borne in mind, however, how steeply the ratio of private consumption to GDP declined at the end of the last decade. In 2016, it was 49.5%, the lowest since 1945, when measurements began. In historical context, this ratio has been extremely low since 2008, averaging 51.8%, as opposed to 58.4% over the period between 1980 and 2007. 

Strong investment growth in 2016

Investment grew by 22.8% in 2016, the strongest since 2006. Business investment growth was considerable, at 26.4%, as was grpwth in residential investment (29.4%). Residential investment grew especially swiftly in the second half of the year. The investment-to-GDP ratio was 21.3% in 2016, much closer to the historical average than it has been in recent years. 

Services exports overtake goods exports

Export growth measured 10.9% in 2016, including 18.6% growth in services exports and 3.7% growth in goods exports. This is the first time since the preparation of national accounts began in Iceland (also in 1945) that revenues from services exports have exceeded revenues from goods exports. Import growth measured 14.5% in 2016; therefore, external trade cut into GDP growth in spite of last year’s ISK 155.4bn trade surplus. This is the eighth year in a row that Iceland has recorded a surplus on external trade.