Attention

This news is more than six months old

Fluctuations in consumer sentiment

The Gallup Consumer Confidence Index declined month-on-month in February, as it did in February 2023. It had risen markedly during the months beforehand, and in January it broke through the 100-point threshold indicating parity between optimism and pessimism for the first time since April 2022. Consumer expectations are in line with developments in key economic variables, private consumption in particular, and give a fair indication of where private consumption is heading.


After having been above 100 points in January, the Gallup Consumer Confidence Index (CCI) fell by 11 points in February, to 90.6 points, which is close to its three-month average (91.6) but noticeably above the twelve-month average (86.3). In January, the CCI measured 101.6 points, its highest value since April 2022. The February measurement can be interpreted to mean that the number of survey participants who are pessimistic about the economy exceed the number of optimistic participants.

The labour market situation is good, but economic conditions are coloured by downbeat sentiment.

All sub-indices except one declined between CCI measurements. The sole upward-trending component is the measure of the current situation, which rose by 5.4 points, to the current 87.8. The component measuring expectations six months ahead fell by 21.9 points this month, to 92.5. Even though both of these sub-indices are below 100 points, overall sentiment among Icelanders is quite a bit more upbeat than it was last autumn.  

The sub-indices measuring expectations vis-à-vis the labour market and the assessment of current economic developments and prospects have also fallen since the last survey. The assessment of economic developments and prospects measures 64.7 but fell by only 0.3 points, while expectations about the labour market situation deteriorated sharply, falling by 24.7 points. Even so, this component measures 112.1 points, which is comfortably above the 100-point equilibrium value and is the only sub-index in positive territory.

Icelanders consider the labour market situation good, but their expectations six months ahead are moderate, indicating declining demand pressures. The assessment of the economic situation has fluctuated widely in the recent term. Economic expectations are relatively negative at present, although they are far from their historical lows and have actually been on the rise since October. In addition, the gap between expectations about the economy, on the one hand, and the labour market, on the other, has been unprecedentedly wide in the recent term. They began to diverge in late summer 2021. Presumably, developments in inflation and interest rates have affected perceptions of the economic situation during a period featuring a tight labour market with plenty of job vacancies.

What can we glean from these findings?

The uptick in optimism this January is probably due in some measure to more positive news coverage of developments in collective bargaining talks. By the same token, the dip in February may well reflect the perceived slowdown in wage negotiations relative to January. It is also likely that the shift stems from a change in attitude caused by the volcanic activity on the Reykjanes peninsula.

In general, the CCI reflects household sentiment quite well, and historically there has been a strong correlation between the CCI and developments in private consumption. The chart below shows that this correlation has been very reliable recently, albeit with a time lag over some periods. Uncertainties are legion at present, and very little is needed to change consumer sentiment. In the near term, Icelanders’ attitudes will probably be affected most by developments in wage negotiations, inflation, the policy rate, and the seismic activity in the Reykjanes area. Favourable developments in the first three of these should give Icelanders cause for cheer as the days grow longer. In all likelihood, expectations vis-à-vis the current situation will deteriorate in the next surveys, but expectations six months ahead should improve accordingly, particularly if interest rate cuts are in the cards. At the moment, indicators imply a swift landing for the domestic economy, suggesting that the CCI reflects actual developments and prospects quite accurately.

Recent developments in private consumption and the Consumer Confidence Index support our opinion that the Icelandic economy is set for a relatively rapid landing, as private consumption has turned a corner and near-term expectations are coloured by downbeat sentiment, reflecting overall pessimism and developments in other economic indicators. If our economic forecast is borne out, Icelanders’ sentiment should improve again over time.

Author


Profile card

Birkir Thor Bjornsson

Economist


Contact