Earlier today Statistics Iceland published figures on balance of trade in services in Q1 2019. It was pretty clear beforehand that the surplus of balance of trade in services would decrease, as tourism has faltered in recent months. This proved to be the case, with the surplus amounting to 29.7 bn. ISK in Q1, a 27% decrease between years, at constant exchange rate. Our forecast for the quarter, from our Economic Outlook published in the beginning of April, was 22.3 bn. ISK surplus, meaning that the figures are somewhat better than we expected. This time around, the difference does not stem from intellectual property exports in the pharmaceuticals industry, but from tourism and Icelanders travelling abroad.
The tourist industry proved to be more resilient than we expected, as tourism generated export revenues (travel and air transport) exceeded our expectations. First of all, more foreign tourists visited the country in Q1 than we expected. March was pivotal, when tourist arrivals only decreased by 1.7%. Smaller than anticipated decrease is, among other things, due to a change in Icelandair’s passenger mix, with increased weight of passengers travelling to Iceland at the expense of transit passengers. Adding to that, not only did more foreign tourists visit the country, spending per tourist also increased more than we expected. On the other hand, air transport export revenues decreased more than we anticipated, or by 26% compared to 20%. This difference might be attributed to unfavorable developments in average fares over the quarter, at least according to Icelandair’s Q1 results.
Sources: Statistics Iceland, Arion Research
Overall, service exports were in line with our expectations. However, service imports turned out to be less than we expected, as Icelanders took fewer trips abroad, which explains why the surplus of balance of services exceeded our expectations. In addition, business services imports decreased by 21% YoY at constant exchange rate, which also weighs down total service imports.
On top of the surplus of balance of trade in services comes the surplus of balance of trade in goods, the first surplus since Q1 2015. The bottom line, the balance of trade in goods and services (BoT), therefore adds up to a 33.2 bn. ISK surplus, compared with 10.4 bn. ISK surplus in Q1 2018, at fixed exchange rate. This is a much larger surplus than we anticipated, unsurprisingly as we forecast a deficit of balance of trade in goods. The difference lies in goods exports, which far exceeded our expectations. The reason is exports of aircrafts, as the sale of four WOW air carriers to Air Canada was not recorded in Statistics Iceland’s export figures until after our forecast was published. When excluding the aircrafts, a deficit of balance of trade in goods is measured.
Sources: Statistics Iceland, CBI, Arion Research
As mentioned above, this is the first surplus of the balance of trade in goods since 2015. The year is therefore off to a great start in the literal sense. However, the surplus of the balance of trade in goods is not a cause for celebration, as it is due to aircraft sales, which means fewer flights to and from the country, fewer tourist arrivals, and in the end, less export revenues.
Sources: Statistics Iceland, CBI, Arion Research
If the latest BoT figures are divided into sunshine and showers, the brightest ray of sunshine is the consumption of tourists, which only declined by 3% YoY at constant exchange rate, but increased by 8% in ISK. As tourist arrivals decreased by 4.7% in Q1, this means that each tourist was spending more than before, both in ISK and foreign currency. It is especially gratifying to see that each traveler is spending more in their own currency, a welcome change from the three consecutive quarters where spending per tourist decreased. This might indicate that each tourist is spending more time in the country, or a proportional increase in high yield tourists. It has been clear for quite some time that tourist arrivals would decrease in 2019. However, if spending per tourist continues to increase, it will dampen the effects on the economy.
Sources: Statistics Iceland, CBI, Icelandic Tourist Board, Arion Research