According to newly published figures from Statistics Iceland (SI), the services account balance was positive by ISK 67.2bn in Q2/2024, or nearly ISK 22bn less than in Q2/2023. The smaller surplus stems from a nearly ISK 12bn contraction in services exports and an increase of almost ISK 10bn in services imports. Services export revenues totalled ISK 251bn during the quarter, whereas expenditures relating to services imports totalled nearly ISK 172bn for the same period.
Increased trade deficit in H1/2024
Iceland’s services account surplus was smaller in Q2/2024 than in the same quarter of 2023, owing to a contraction in tourism-generated revenues and an increase in expenditures related to services imports. The H1/2024 deficit on combined goods and services trade was six times as large as the deficit for H1/2023. Weaker external trade is the likely cause of less favourable developments in the ISK exchange rate in the first eight months of 2024 than in the same period in 2023.
As has been customary, the surplus stems mainly from the fact that export revenues generated by tourism and related sectors far outweighed comparable expenditures relating to Icelanders’ overseas travels. Travel, transport, and shipping generated ISK 87bn in net export revenues, or ISK 9bn less than over the same period in 2023. Furthermore, there was a surplus of just under ISK 7bn on R&D-related trade. All of this was offset by, among other things, a nearly ISK 11bn deficit on trade relating to tech services and related sectors; a nearly ISK 5bn deficit on trade in cultural and recreational services; and a deficit of almost ISK 5bn on cross-border payments for management, advisory, and expert services.
Contraction in tourism revenues
After growing strongly for several years, export revenues relating to passenger transport and travel shrank year-on-year in ISK terms in Q2/2024. In all, these travel- and transport-related revenues totalled ISK 154bn during the quarter, down from ISK 160bn in Q2/2023. This aligns quite well with the nearly 10% decline in foreign guests’ registered overnight stays and the nearly 6% drop in foreign nationals’ departures via Keflavík Airport over the same period. Nevertheless, revenues from this source were close to the Q2 peak for the period since the surge in tourism began.
Icelanders’ overseas travel-related expenditures remained broadly flat YoY in ISK terms, however, totalling a scant ISK 66bn in Q2/2024, as compared with just under ISK 65bn in Q2/2023. Over the same period, Icelanders’ overseas trips declined in number by nearly 6%, according to figures on departures via Keflavík Airport. It should be borne in mind, though, that this year’s Easter holidays fell mostly in the month of March. As a result, this year’s Easter travellers were included in Q1 figures, while last year’s were included mostly in Q2 figures. With that in mind, it appears that Icelanders’ travel expenditures and departures from the country lined up fairly well during the period.
Larger deficit than in 2023
Goods and services trade figures for the first half of 2024 are how available. In all, services trade generated a surplus of ISK 85bn in H1/2024, as compared with a surplus of ISK 116bn over the same period a year ago. On the other hand, this year’s H1 goods account deficit totalled ISK 146bn, some ISK 20bn more than in the same period of 2023. The deficit on combined goods and services trade was therefore ISK 60bn during the period, as compared with last year’s H1 deficit of ISK 10bn.
Despite this year’s less favourable H1 trade balance, exchange rate movements were broadly the same in both years. In H1/2023, the ISK appreciated by almost 3%, according to the Central Bank’s (CBI) trade-weighted exchange rate index, while this year’s appreciation totalled just under a percentage point. Developments in Q3/2024 to date have been quite different from those in the same quarter of 2023. The ISK has weakened by a full percentage point since the beginning of July, whereas it strengthened by over 3% during the same period in 2023. Although other factors weigh heavily in the foreign exchange market – often considerably outweighing the trade balance – it is probably important that flows relating to goods and services trade have been considerably more negative this year than in the first eight months of 2023.
As the chart indicates, tourism’s share in export revenues has rebounded in the recent past, after the lull during the pandemic. In all, nearly one-third of Iceland’s total export revenues over the twelve months from July 2023 through end-June 2024 were tourism-related. This is only slightly less than the share contributed by marine products and aluminium combined. Export revenues generated by non-tourism services have grown as well, to 17% of total export revenues over this same period, while exports of goods other than fish and aluminium contributed 15% of total export revenues.
At the beginning of September, the CBI will publish figures for the two remaining components of the current account balance, thereby giving a complete picture for Q2. It can be expected that a surplus on primary income and a deficit on secondary income will more or less offset one another, has they have in recent quarters. The likely outcome, however, will be a current account deficit, owing to the deficit on goods and services trade. Time will tell whether the H1 deficit is counterbalanced by a surplus in H2, but it is worth noting that the forecast in the CBI’s newly published Monetary Bulletin provides for a marginal current account deficit in 2024 as a whole. Like the CBI, we also consider prospects for the current account to have deteriorated somewhat in the recent term, although we still expect it to be broadly in balance for the full year.
Analyst
