Overseas use of Icelandic payment cards has been gaining steam in the recent past, though. In September, card turnover abroad rose by 7.8% YoY in real terms. Thus far in 2024, overseas card turnover has grown every month apart from April, when it shrank by nearly 4% in real terms because Easter came in March this year. In 2024 to date, Icelanders’ departures via Keflavík Airport have increased by 1% relative to the same period in 2023. The rise in overseas card turnover is probably due mostly to a jump in e-commerce.

In price- and exchange rate-adjusted terms, Icelandic households’ total card turnover grew YoY by 0.3% in September and 2.6% in Q3.

Card turnover data suggest more sluggish growth in private consumption

Although card turnover data for individual months tend to fluctuate, it is noteworthy how stable the three-month moving average has been this year. This stability indicates that households’ consumption patterns have reached some sort of equilibrium at the current real interest rate level. In terms of the three-month moving average, real card turnover (at home and abroad) has increased by between 2.6% and 3.6% since February. This is a much narrower range than could be seen before then, but over the same period in 2023 the standard deviation by this measure was about ten times larger.

Private consumption ticked upwards unexpectedly in Q1/2024, after shrinking in the last two quarters of 2023. The recent revision of payment card turnover data puts this into clearer context, as previous figures strongly indicated a contraction. In Q2, however, private consumption contracted by 0.9%. According to Statistics Iceland (SI), the strongest contraction was in the purchase of consumer durables such as cars, although services consumption shrank as well. In this context, it is well to remember that car purchases are the form of consumption most likely to be credit-financed to a large extent, and the interest burden on car loans has soared in the recent term.

We expect households to remain cautious about buying durables in coming quarters, as high real interest rates push financing costs and sacrifice costs higher. Over the course of 2025 and in 2026, however, consumption of durables will pick up again as interest rates and inflation decline, making financing cheaper and freeing up savings. In our recently published macroeconomic forecast, we projected that private consumption growth would measure 0.8% in 2024 and then rise to 2% in 2025 and 2.5% in 2026.

Households and businesses grow more pessimistic

The Gallup Consumer Confidence Index measured 61.2 points in September, its lowest value in four years and a nearly 30% relative to the same month in 2023, indicating a surge in downbeat sentiment recently. Corporate executives are also more pessimistic than before, according to a survey taken by the Confederation of Icelandic Employers. The share of executives who expect conditions to improve in the next six months declined between surveys, to 26%, and the share who expect them to worse nearly doubled, to 31%. The same pattern can be seen in firms’ recruiting plans: the share of executives who do not consider themselves understaffed rose slightly between surveys and now measures 73%. Only 15% of survey participants expect to recruit workers in the next six months, while 22% plan to downsize and 62% expect to keep their staffing levels unchanged.

These figures imply that the labour market has cooled in the recent past, supporting us in our belief that wage drift will be limited and inflation on a downward trajectory in the coming term. They also reinforce our opinion that private consumption growth will be fairly tepid in the near future, as these variables often correlate strongly, and all else being equal, they enhance the likelihood of a larger policy rate cut in November.