For Q1/2025 as a whole, the deficit on goods trade measured ISK 101bn, up from ISK 69bn over the same period in 2024. Actually, exports grew by a robust 15% year-on-year at constant exchange rates but were more than offset by a 23% YoY increase in goods imports. On the imports side, the main difference lay in vastly increased imports of investment goods, by an exchange rate-adjusted 63% between years. Although we have no information on what type of goods these were, we think it likely that they were related to export sectors to a large extent – data centre development, for instance. If so, and all else being equal, these imports should be accompanied by less buying activity in the FX market; furthermore, they should generate export revenues in the future. Such import growth therefore gives less cause for concern than, for example, a surge in consumer goods imports would.

On the exports side, manufactured goods exports grew handsomely, at 30% for aluminium and 60% for pharmaceuticals and medical equipment. On average, aluminium prices were far higher in Q1/2025 than in the same quarter of 2024, but prices have fallen precipitously since the beginning of April, owing to the chaos [AB1] surrounding the US government’s tariff regime. Growth in exports of goods from pharmaceuticals and medical equipment companies is probably related to stronger activity among large exporters in the sector, which can be classified as part of Iceland’s intellectual property industry, a sector that, as we have discussed before, we expect to contribute significantly to export growth in the near future.

Tourism softens

Q1 was somewhat weaker than expected for the tourism industry. According to recently published figures from the Icelandic Tourist Board, about 148,000 foreign nationals departed Iceland via Keflavík Airport in March, a decline of 14% YoY. It should be borne in mind that the Easter holidays fall just after mid-April this year but straddled the end of March and the beginning of April in 2024. But this could well prove to be cold comfort, given that Easter fell relatively late in both 2017 and 2019 (as it did in 2025), yet March tourist numbers were considerably higher in both of those years.

As before, Americans were the largest nationality group among visitors in March, accounting for 23% of the total. They were followed by visitors from the UK (13%), Germany (9%), China (6%), and France (5%). Tourists from the other Nordic countries accounted for a combined 4% of visitors during the month. The share of UK nationals among wintertime tourists has tumbled in recent years, while the share of visitors from the US and Asia has increased.

This year’s plunge in British visitor numbers gives cause for genuine concern. According to the above-referenced Tourist Board figures, the number of UK nationals visiting Iceland was down 29% YoY in Q1. British tourist visits in Q1 peaked at 124,000 in 2017 but were down to 80,000 this year.

Actually, though, Keflavík Airport departure numbers should be interpreted with more than a little caution, as is pointed out on the news website ff7. Nevertheless, the big picture lines up well with recent statements from key industry players, as is reported by Morgunblaðið. According to that report, there are calls for increased marketing of winter trips to Iceland, as the country appears to be falling behind other Nordic destinations among tourists – particularly British tourists – looking to experience the Arctic.

 [AB1]ATH: If you think chaos is too strong, we could go with turmoil … although I think chaos is putting it rather politely. The word clusterfuck comes to mind, actually ...

In all, 416,000 foreign nationals visited Iceland in Q1, according to the Iceland Tourist Board’s departure numbers. Apart from the pandemic years 2020-2022, this is the lowest Q1 total since 2016. While the surge in visitors from the US is certainly welcome, it could expose the sector to greater downside risk, as the US administration’s trade war could cut into Americans’ zest for travel in the quarters ahead.

Wide current account deficit probable in early 2025

Tourist numbers do not bode terribly well for the Q1 services account balance. Nor does it help that Icelanders stepped up their own overseas travel by a full 13% YoY during the quarter, despite the above-mentioned differences in the dates of the Easter holidays. In Q1/2024, services trade generated a surplus of just over ISK 18bn, but our rough estimate, which takes account of the above-described developments, suggests that this year’s Q1 surplus on services trade will be only half that size.

Given the aforementioned goods account deficit, the combined goods and services trade deficit could end up about the same as in Q4/2024, when it totalled nearly ISK 70bn.

Considering the hefty current account deficit in 2025 to date, the ISK has been noticeably stable. In our opinion, this is due mainly to three factors:

• First, it is likely that a sizeable share of this winter’s surge in investment goods imports is financed by non-resident entities and therefore does not affect the buying side of the domestic FX market.
• The pension funds have scaled down their FX purchases significantly in 2025 to date. According to the Central Bank’s (CBI) newly issued Financial Stability report, the funds bought only ISK 2.7bn worth of currency in January and February combined, far below the average of ISK 7bn per month in 2023 and 2024. The CBI also points out that the pension funds received hefty payments in stock and foreign currency with the merger of JBT and Marel.
• In addition, financing-related inflows were substantial. It is stated in Financial Stability, for instance, that non-residents’ holdings in Icelandic Treasury bonds increased by almost ISK 7bn in the first two months of 2025. Actually, it is noted in the most recent issue of Government Debt Management’s monthly Market Information newsletter that these non-residents scaled down their net Treasury bond and Treasury bill positions by ISK 2bn and ISK 2.3bn, respectively, in March. Non-residents’ holdings in Treasury bonds and bills totalled nearly ISK 112bn at the end of March.

In other words, the recent current account deficit has been financed to a large extent with direct and indirect inward foreign investment at a time when financing outflows due to outward foreign investment have been minimal.

At the end of January, we projected that the current account would be broadly in balance this year, after a sizeable deficit in 2024. Since then, prospects for exports in 2025 have dimmed somewhat, most recently because of the potential impact of the trade war stoked by the US authorities in recent weeks. Furthermore, investment goods imports have been stronger year-to-date, and indicators of private consumption suggest growth ahead, which will call for robust imports of consumer goods. Although imports could sag somewhat if the effects of the trade war extend to demand in Iceland and other countries, it is growing increasingly likely that this year’s current account deficit will turn out fairly wide. Whether this results in a weaker ISK later in the year will depend on residents’ and non-residents’ appetite for financing the deficit through borrowing and inward investment.