Record surplus on services trade in Q3

A hefty services account surplus in Q3, coupled with unexpectedly favourable developments in goods trade, suggests that this year’s current account surplus will be sizeable. Icelanders’ rapidly growing appetite for foreign travel has cut into the surplus on services trade, however, and the impact of the weaker ISK on the overall trade balance will show in the final months of 2018, as well as in the quarters to come.

The surplus on services trade in Q3 was the largest single-quarter surplus ever recorded, at nearly ISK 124bn, overtaking the previous record of just under ISK 123bn, set two years ago. According to newly published figures from Statistics Iceland (SI), the year-on-year increase in the surplus measured ISK 8bn.

9m services surplus narrows slightly YoY

The surplus on services trade measured just under ISK 210bn for the first three quarters of 2018, down from ISK 219bn over the same period in 2017. Both imports and exports of services grew over the period, with import growth carrying the day, at nearly 16% YoY, as opposed to just over 7% for export growth. As has generally been the case in recent years, key components of the services account balance showed a handsome surplus, apart from “other services trade”, which includes leasing expense for ships and aircraft.

Revenues from overseas travel increased by just over 3% YoY in the first nine months, to slightly more than ISK 269bn. But Icelanders’ legendary wanderlust appears to have increased even more, as growth in expenditures from overseas travel measured nearly 8% over the period, to nearly ISK 148bn, making for a travel-related services account surplus of just over ISK 121bn. 

Brighter outlook for the trade balance

SI also published transition tables for the trade balance, which show goods and services trade on a balance of payments basis. By this metric, the surplus on combined goods and services trade in Q3 measured ISK 80bn, the largest single-quarter surplus in two years. Of vital importance, of course, is the fact that most of the peak tourist season falls in the third quarter of the year.

The surplus on goods and services trade in 2018 to date totals ISK 90bn. In 2017, the surplus for the first nine months totalled nearly ISK 93bn, indicating that this year’s figures represent very little change. In short, then, this year’s services account surplus has turned out somewhat smaller year-to-date than we had expected, particularly in H1. On the other hand, the goods account balance has developed much more favourably than we had anticipated, not least because of a YoY contraction in imports of transport equipment and commodities. The goods account deficit totalled nearly ISK 120bn in the first three quarters of 2018, as opposed to a deficit of nearly ISK 127bn in 9m/2017. 

The Central Bank (CBI) will publish figures on the balance of payments and external position through end-Q3 this coming Monday. Those figures will give a comprehensive view of the current account balance for the first three quarters of 2018, as they will include the balance on primary and secondary income as well. Based on the figures above, however, it is already obvious that the nine-month period generated a sizeable current account surplus. In our macroeconomic forecast, published at the end of September, we projected this year’s current account surplus at approximately ISK 65bn, or 2.3% of GDP. The figures above suggest that our forecast was on the conservative side, and that the surplus could turn out somewhat larger, particularly in view of the recent depreciation of the ISK and the impact it will probably have on external trade in the final months of the year.