In nominal terms, turnover with domestic payment cards increased in January by a scant 3% year-on-year, to just under ISK 104bn. In price- and exchange rate-adjusted terms, however, it contracted by 1.1% YoY during the month. This overarching trend, which has been ongoing since April 2023, clearly depicts the cooling of household demand.
Continued slowdown in household card turnover
Domestic demand has slowed markedly in recent quarters, as has been indicated clearly by households’ payment card turnover, which has continued to shrink, according to newly published data for January. In our macroeconomic forecast, we projected that private consumption would contract in H1/2024 but then start growing again in H2.
Domestic card turnover shrinks, while turnover abroad increases
Households’ card use in Iceland contracted in real terms by 2.3% in January, while real card turnover abroad grew by nearly 4% over the same period. This was the second month in a row with a rise in overseas turnover, after a contraction lasting six months. Despite the increase in foreign turnover, fewer Icelanders travelled abroad in January than in the same month of 2023. In all, 39,000 Icelanders departed the country via Keflavík Airport in January, an 11% decline from the January 2023 total of 41,000. The rise in turnover could be due to an uptick in overseas e-commerce in the past two months. Furthermore, the recent appreciation of the ISK may well have revitalised Icelanders’ overseas consumption.
Private consumption shifts gears
Private consumption shifted into reverse in 2023, after a two-year growth spurt. In H1 it grew by 2.5%, but in Q3 it contracted for the first time since 2020. We think it likely that it contracted in Q4 as well, and payment card data for the quarter support this conclusion. We project year-2023 private consumption growth at 0.7%. Statistics Iceland (SI) will publish the national accounts for the full year at the end of February.
Domestic demand has clearly lost pace, and households are obviously keeping their wallets more firmly closed. By this measure, policy rate hikes are delivering significant results. The newly published card turnover data for January also suggest that private consumption will continue to shrink in early 2024. In our most recent macroeconomic forecast, we project that private consumption will contract in H1 and then return to growth in H2, with the growth rate for the entire year measuring about 1%.
For 2025, however, we project that growth will accelerate to around 2.5% as inflation eases and fuels slightly stronger real wage growth. In 2026 we expect the economy to be better balanced, with private consumption growth measuring approximately 3%.
