In the main, exports maintained the pattern set in recent quarters, albeit with some month-to-month fluctuations. Marine product exports were actually quite muted, at only a scant ISK 24bn, and exports of manufactured goods apart from aluminium were similarly weak. Manufactured goods exports came to less than ISK 12bn, the smallest total since April 2023, but were offset by robust aluminium exports. Aluminium and aluminium products were exported for slightly more than ISK 30bn, making December the strongest month since June 2023. It is worth noting in this context that aluminium prices fluctuated widely within the month of December, but based on common contracts used as a reference by Trading Economics, they averaged just over USD 2,380 per tonne, the highest price seen since March 2023.

On average, imports have weakened in recent months, although they have been volatile enough from one month to another that it is impossible to draw firm conclusions about underlying patterns. Among individual items, passenger car imports amounted to ISK 12bn, the largest single-month total in ISK terms since last March.

At the beginning of this year, the agency Bílgreinasambandið (BGS), an umbrella organisation representing companies engaged in the sale and service of motor vehicles, released updated figures on new car sales during December, showing a surge in new car registrations in the final weeks of 2023. There is little doubt that buyers were racing against time to purchase new electric cars before the turn of the year, when changes in levies on these vehicles took effect. It turned out that nearly 92% of new cars sold to individuals and companies (excluding rental agencies) in December were electric, and another 5% were some sort of hybrid.

Imports of generic consumer goods were weak relative to the months beforehand, however, as were imports of fuel and investment inputs.

Goods trade follows the business cycle

If we try to look through the monthly fluctuations and the effects of ISK exchange rate movements on goods trade data, we can see a fairly distinct turnaround in imports and exports alike. After a surge lasting from early 2021 until late 2022, growth slowed markedly on both sides of the goods account balance. Exports fell earlier and more strongly than imports, however, and the goods account deficit hit a high last summer, partly because of greater need for inputs in the tourism sector. In Q4, though, both imports and exports contracted sharply by this measure: exports shrank nearly 13% and imports fell almost 9% during the quarter.

This pattern mirrors the business cycle in recent quarters relatively well, as GDP growth was brisk in 2021 and 2022 but tapered off steadily over the course of 2023. Although the price of key exported goods and imported inputs also plays a role here, the shift goes hand-in-hand with developments in private consumption and investment. The changed tempo of goods export volumes, featuring smaller fishing quotas for various groundfish species and weaker pelagic fish catches, weighed in as well.

Surplus on services trade and deficit on goods trade offset one another in 2023

The goods account deficit came to a total of ISK 394bn in 2023 as a whole, some ISK 93bn more in 2022. The steep increase is due almost entirely to goods export values, which contracted in ISK terms by ISK 91bn between years, to ISK 914bn in 2023. The main contributors to the decline were a 13% YoY drop in the value of manufactured goods and a 4% drop in marine product export values.

However, goods imports increased in nominal terms by ISK 2bn YoY, to a 2023 total of ISK 1,308bn, as stronger imports of investment inputs, transport equipment, and food and beverages offset a contraction in imports of commodities and operational supplies such as fossil fuels and related goods.

But the growing goods account deficit does not tell the whole story about developments in external trade in the recent term. Another factor is the skyrocketing surplus on services trade that has accompanied the post-pandemic recovery of tourism.

Statistics Iceland publishes data on combined goods and services trade by month and quarter. In contrast to the FOB/CIF basis used in the data above, goods trade is recorded on a BoP basis, which tends to yield somewhat more beneficial results in terms of trade balance. In the first three quarters of 2023, the surplus on services trade came to ISK 262bn, more than overtaking the ISK 225bn goods trade deficit for the period using the BoP method.

Available data for October plus our own rough estimate of developments in services trade for the final months of 2023 suggest that the services account surplus for Q4 lay in the ISK 40-45bn range. If this estimate proves reasonably accurate, the deficit on combined goods and services trade in Q4 will probably come out around ISK 45bn. For 2023 as a whole, then, the trade balance appears to have been broadly in equilibrium.

The outlook is for this equilibrium to continue. As in 2023, the services account surplus and the goods account deficit will pull against one another, and in ISK terms, the outlook is for both balances to grow. That said, part of the goods account deficit is due to stronger services exports, which necessitate more imported inputs. As a result, we do not think external trade will be a significant drag on the ISK exchange rate; in fact, we think trade-related FX flows are likelier to benefit the ISK than to weigh it down.