Growth in payment card turnover loses steam …

We turn now to domestic demand, where investment and private consumption play leading roles. Both of these turned out relatively sturdy in Q1, with investment growing by 2.4% YoY and private consumption by 0.2%. There are many signs that this same robustness extended into Q2. Household payment card turnover grew in real terms by 4.5% in May, for instance, the strongest real growth rate since January 2023. In June, however, there was a slight downturn in price- and exchange rate-adjusted terms. This was underpinned by a contraction of just under 2% in turnover within Iceland and an offsetting increase of more than 5% YoY in turnover abroad. Presumably, the latter figure reflects the 17% YoY jump in Icelandic nationals’ departures via Keflavík Airport in June, doubtless a response to Iceland’s chilly and rainy June weather.

… and consumer sentiment tumbles

Other metrics indicate clearly that households are trimming their sails at present. The Gallup Consumer Confidence Index fell precipitously in June, hitting 75.4 points, its lowest value since October 2023. July saw an uptick to 83.1 points, which was nevertheless the second-lowest value of the year. The quarterly big-ticket index, which measures Icelanders’ planned purchases of homes, motor vehicles, and overseas travel, also fell between measurements this June. New motor vehicle registrations by individuals plunged by nearly 50% during the month, continuing the steep slide that has characterised all of 2024.

Two surveys, divergent results from corporate executives

Recent measurements of large company executives’ expectations suggest that they, too, are bracing themselves to an increasing degree. We have recently reported on newly conducted surveys indicating changes in executives’ staffing plans, which suggest that demand for labour will subside in coming quarters.

In other matters on which executives took a stance, however, the results were somewhat ambiguous. Participants in the Gallup survey carried out this spring for the Central Bank (CBI) and the Confederation of Icelandic Employers showed an uptick in optimism. Executives’ attitudes towards the current economic situation and the outlook six months ahead were their most positive since H1/2022.

The survey taken by Deloitte among chief financial officers at Iceland’s 300 largest firms – part of a larger survey conducted in 13 European countries by Deloitte and its sister companies – gave very different results. In spring 2023, Icelandic CFOs were far more upbeat about developments in revenues, investment, and recruitment of new staff members than their counterparts in other European countries were. This spring, however, Icelandic respondents’ expectations had taken a nosedive, falling below the European average as regards revenue growth, staffing, and investment.

The survey findings also showed that interest rates were the biggest risk factor in domestic companies’ operations, followed by inflation. In addition, a fifth of Icelandic CFOs were of the view that the financial outlook had improved in the previous three months, as compared with an average of over one-third among their European counterparts.

This discrepancy in responses is intriguing, as the two surveys appear to have been taken at roughly the same time; i.e., April-May. The results of Gallup’s new corporate expectations survey are set for publication before the end of Q3, and it will be interesting to see whether they align more closely with the Deloitte survey.

Leading indicator on the decline

Last but not least, it is instructive to take a look at the Icelandic composite leading indicator (CLI), compiled by consultancy firm Analytica using OECD methodology. The CLI has been declining steadily over the past two years, falling to a three-year low in June 2024. It is compiled from data on domestic demand (debit card turnover, imports, the Gallup Consumer Confidence Index) and exports (tourist numbers, fishing quotas), as well as global share price indices.

As the chart shows, the pace of growth in the economy correlates well with changes in the CLI, which is designed to give an indication of how the economy will develop roughly six months ahead. It therefore aligns well with various other indicators showing that the economy will continue to cool. Fortunately, there are few signs as yet that this cooling will be excessive. In fact, it can be viewed as an adjustment towards better equilibrium after an expansionary period. The outlook is for weak GDP growth in 2024, however, and it looks as though our May forecast of 0.9% growth for the year will prove to be on the optimistic side.