Gross Domestic Product (GDP) is estimated to have decreased by 9.3% in volume in the second quarter of 2020 compared with the same quarter of 2019. This is the largest fall in quarterly GDP since Statistics Iceland began measuring economic growth on quarterly basis. Measurements of GDP in Q2 show a significant impact of the Covid-19 pandemic and the measures taken to counter its spread, locally as well as globally.
Travel restrictions had significant effect on both imports and exports of services during the period, but results also show multifarious impacts of the restrictions in effect during the pandemic on demand for goods and services. The national accounts employment indicator, which generally gives a strong indication of the volume of goods and services produced for final use, points to a decline in employment of 11.3% in the second quarter of 2020 compared with the same quarter of 2019.
In Q2, domestic demand, the aggregate of household and government final consumption expenditure and gross fixed capital formation, decreased by 7.1% compared with the same period in 2019. Household final consumption expenditure (HFCE) decreased by 8.3%, government final consumption expenditure (GFCE) increased by 3.0% and gross fixed capital formation (GFCF) decreased by 18.7%.
A significant decrease was measured in imports as well as exports in Q2 compared with last year’s corresponding quarter. Exports decreased by 38.8% while imports decreased by 34.8%. The deficit in the balance of trade in goods and services was 5.4 billion ISK in Q2.
Seasonally adjusted GDP fell by 9.1% in volume in Q2 2020 compared with Q1 2020.
| Quarterly national accounts, 2nd quarter of 2020 | ||||
| Current prices million ISK | Volume change on the same period of the previous year, % | Volume change from previous quarter,% | ||
| 2nd quarter | 2nd quarter | 1st - 2nd quarter | 2nd quarter | |
| Private final consumption | 362,456 | -8.3 | -4.0 | -9.0 |
| Government final consumption | 196,452 | 3.0 | 2.5 | 1.2 |
| Gross fixed capital formation | 138,201 | -18.7 | -8.5 | -3.7 |
| Changes in inventories | 6,450 | 0.6 | … | … |
| Gross domestic final expen | 703,560 | -7.1 | -2.4 | -4.2 |
| Exports of goods and services | 215,555 | -38.8 | -28.6 | -32.4 |
| Imports of goods and services | -220,967 | -34.8 | -22.9 | -22.1 |
| Gross domestic product | 698,148 | -9.3 | -5.7 | -9.1 |
International comparison
Despite the fact that the fall in Iceland‘s GDP is historical, the first results of an international comparison indicate an even greater fall in GDP in many countries. This is especially true of countries that are considered to have been hit relatively hard by the Covid-19 pandemic in the recent months. The European Union as a whole experienced a fall of 11.7% in volume in Q2 2020 compared to Q1 2020. The decrease was 20.4% in the United Kingdom, 18.5% in Spain and 13.8% in France. For the same period, the decrease in GDP was 4.5% in Finland, 5.1% in Norway, 7.4% in Denmark and 8.3% in Sweden. In all cases, these are preliminary estimates published by the respective national statistical institutes in the recent weeks and are presented subject to raised uncertainty in the quarter’s figures.
Seasonally adjusted figures. Sources: Eurostat, Statistics Sweden, Statistics Finland.
Household final consumption expenditure decreased by 8.3%
During Q2, household final consumption expenditure fell by 8.3% compared with the same period in 2019. As a consequence of the Covid-19 pandemic and the measures taken to counter its spread, a drop was measured in various components of household consumption, e.g. the direct purchases abroad by resident households decreased by 83.2% in volume during the period. However, there was an increase in some components of household consumption such as the consumption of pharmaceuticals and other medical goods, electronic services and alcohol. In some consumption components direct impacts of the limit of larger gatherings and social distancing measures are visible and these include decrease in purchase of companies’ services that were forced to close temporarily during a part of the period, e.g. cosmetic and hairdressing services. The decline in purchases of vehicles was also significant during Q2 or close to 35% in volume compared with last year‘s corresponding quarter.
Gross fixed capital formation decreased by 18.7%
As aforementioned, GFCF decreased by 18.7% in Q2 2020 compared to the same period last year. Despite substantial growth in government investment in road construction, there was a decrease of 17.3% in government investment in Q2 2020 compared to Q2 2019. This can to some extent be explained by base effect, as a result of a significant increase in government investment in Q2 2019 when the State received a new Herjólfur (ferry) and the investment was charged. Excluding the State’s investment in Herjólfur, government investment increased by 15% in volume during Q2 2020 compared to Q2 2019. Local government investment, on the other hand, decreased by 9% compared to last year’s corresponding quarter and is lower in the first half of 2020 than the local governments’ plans provided for.
Residential investment (GFCF in dwellings) decreased by 21.3% in Q2, the largest fall since Q2 2010. Despite this significant decrease during the quarter, the construction of residential real estate is still historically large and amounts to 5.2% of the quarter’s GDP. In the first six months of the year, residential investment decreased by 13.6% compared with the first six months of 2019. As stated in a news release due to Q1 figures, the issuance of building permits has decreased considerably recently as well as housing in the early construction phases. This is generally considered a good indication of the expected trend in residential investment.
Business sector investment decreased by 17.8% in Q2 2020 while business sector investment in the first six months of the year decreased by 4.7% compared with the first six months of 2019. Excluding the effects of investments in ships, aircrafts and heavy industries, business sector investment decreased by 11.3% in Q2 2020 compared with Q1 2020. Negative balance of trade for goods and services
The total deficit in the balance of trade in goods and services was 5.4 billion ISK in Q2 2020, compared with a surplus of 8.7 billion ISK in Q2 2019, at current exchange rates. Due to a greater decrease in exports than imports in Q2 2020, external trade contributes negatively to GDP growth. The deficit in the balance of trade in goods was 9.2 billion ISK in Q2 2020, with total exports and imports of goods measured as 149.2 billion ISK and 158.4 billion ISK. In the balance of trade in services a surplus of 3.7 billion ISK was measured in Q2 2020 with total exports and imports of services measured as 66.4 billion ISK and 62.6 billion ISK. In the first six months of 2020, the deficit in balance of trade in goods and services was 1.1 billion ISK but a surplus of 43.5 billion ISK in the same period in 2019.
Increase in stock
In Q2, the total value of inventories increased by 6.5 billion ISK, at current prices, compared with the value in Q1 2020. The largest increase was in the stock of aluminium, but stocks of marine products also increased significantly during the period.
GDP decreased by 5.7% in the first six months of 2020
GDP in the first six months of 2020 decreased by 5.7% in volume compared with the first six months of 2019. In the same period, gross domestic final expenditure decreased by 2.4% where HFCE decreased by 4.0% in volume, GFCE increased by 2.5% and GFCF decreased by 8.5%. Exports decreased by 28.6% and imports by 22.9% in the first six months of 2020 compared with the same period of 2019.
GDP per capita decreased by 0.3% in 2019 – revised figures
Along with the publication of Q2 figures of national accounts, Statistics Iceland now publishes the first preliminary figures for 2019, but estimated GDP based on the quarterly accounts was published on 28 February 2020. According to preliminary annual figures for 2019, GDP amounted to 2970 billion ISK, an increase in volume of 1.9% from 2018 compared with a 3.9% growth in 2018. Taking into account population growth of 2.2%, GDP per capita decreased by 0.3% in 2019.
Planned benchmark revision and change of reference year
A benchmark revision of national accounts time series that was planned in addition to the publication of statistics for Q2 has been postponed. Revised time series are scheduled to be published along with the publication of figures for Q3 on 30 November 2020. Particular emphasis is placed on the revision of the sectoral classification in accordance with the ESA 2010, especially with regard to the demarcation of the general government sector in Icelandic national accounts, where some classifications are currently being examined. In all cases, the reclassifications refer to institutions that have hitherto been classified outside the general government sector. In the process of reclassification of specific cases, formal advice has been requested from Eurostat. Eurostat’s opinions regarding the sector classification of the Housing Financing Fund and the institutions and funds that took over its role in a merge in 2020, with legislative changes at the end of 2019 as well as the classification of the Icelandic Student Loan Fund, have been made public on Eurostat‘s website. In both cases, the conclusion is that these institutions should be reclassified inside the general government sector. Concurrently with the benchmark revision, the reference year for chain-linked volumes will be changed to 2015 instead of 2005, as has been the case since 2011.