Strong GDP growth in H1 2018

Output growth has been stronger than expected in the recent past. In particular, the contribution from net trade has been favourable in 2018 to date, although private consumption growth has eased. Investment growth in H1 was driven to a large extent by residential construction. The composition of growth was relatively positive during the half, indicating that the economy is trending towards a better balance than has generally been seen heretofore.

According to new figures from Statistics Iceland (SI), GDP grew by 6.6% in Q2/2018,  exceeding our expectations, with the difference stemming mainly from strong investment growth and a positive contribution from net trade.

Because Icelandic quarterly national accounts figures can be quite volatile and are subject to change upon review, it is useful to look at the first two quarters of the year together, as they give a clearer picture of recent developments. First-half figures show a pattern much like that described above. GDP growth measured 6.4% in H1, which was more than we had expected.

 Private consumption growth has slowed down since last year. In real terms, it grew 5.3% YoY in H1/2018.  In addition, it was somewhat weaker in Q2 (5.1%) than in Q1 (5.6%), which is well in line with developments in key indicators of private consumption. In 2017, private consumption grew by 7.9%, the fastest growth rate since 2007. It appears, however, that Icelandic households are exercising caution at present, as there are few signs as yet of significant credit-financed private consumption growth, unlike the situation during the latter part of the upswing in the 2000s. 

Residential investment picks up

Residential investment is one of the pillars of the 7.6% YoY investment growth measured in H1. Investment in residential property grew by over 24% YoY, while business investment increased by just under 6% and public investment by 0.2%. This surge in residential investment is surely welcome, given the impact of the housing shortage on the real estate market in the recent past.  But now there are signs that the market is normalising, and the figures above suggest that this trend will continue.

The turnaround in the contribution of goods trade to GDP growth is the main reason the contribution from net trade as a whole was positive by 0.2% in H1. In recent years, the contribution from net trade has been negative despite a sizeable current account surplus, as import growth has generally outpaced export growth.  Goods exports grew by over 6% and services exports by more than 3% during the period. On the imports side, goods imports contracted by 1% YoY, while services imports grew by nearly 13%.  Total exports were up 4.5% YoY in H1, and imports by 4.1%.

Positive signs for the economy

On the whole, the new national accounts numbers are more positive than might have been expected. Private consumption growth is settling down, and external trade is better balanced than the high real exchange rate and the length of the current upward cycle might have suggested. And growth in residential investment should deliver a healthier real estate market in coming quarters. Finally, moderate growth in business investment should indicate that the risk of overinvestment in sectors such as tourism is less pronounced than it might have been otherwise. 

Most indicators imply that the Icelandic economy is approaching equilibrium after a long and strong upswing. We expect GDP growth to be much more modest in H2, owing to slower growth in private consumption, a more negative contribution form net trade, and a probable contraction in business investment. Nevertheless, we anticipate handsome GDP growth for the year as a whole, with a relatively soft landing after the recent growth spurt.