Gross Domestic Product (GDP) is estimated to have decreased by 1.2% in the first quarter of 2020 compared with the same quarter of 2019. Despite the considerable negative impact of external trade on GDP in the first quarter, largely due to a decline in tourism, gross domestic final expenditure (GDFE) increased in real terms during the period.
Gross domestic final expenditure, the aggregate of household and government final consumption expenditure and gross fixed capital formation, increased by 2.9% in real terms in Q1 2020 compared with the same period last year. Household final consumption expenditure (HFCE) increased by 0.9% and government final consumption expenditure (GFCE) by 2.3%. Gross fixed capital formation (GFCF) increased by 4.1% from the same period last year. This growth in capital formation can to some extent be explained by base effect, due to the sales and exports of aircraft in Q1 2019 as GFCF excluding capital formation in ships and aircraft was negative by 15.8%, compared with last year’s corresponding quarter.
External trade contributes negatively to economic growth in Q1 2020 due to a greater decrease in exports than imports.
Household final consumption expenditure increased by 0.9%
Despite the significant impact of the Covid-19 pandemic on various components of household consumption, mainly on the direct purchases abroad by resident households, there was considerable increase in other components of household consumption, including the purchases of vehicles. The estimates indicate an increase in HFCE of 0.9% in real terms in Q1 2020 compared with the same quarter last year. Measurements of HFCE are dependent, to some extent, on information from VAT-turnover that have not been made available for the period of the quarter that is expected to be the most affected by Covid-19 responses and effects, such as ban on public gathering. This is due to the implementation of VAT collection in Iceland and measurements are therefore based on other available information including information on credit card turnover. As usual, these measurements will be revised when more detailed information become available.
26.1% decrease in business sector investment, excluding ships and aircraft
As aforementioned, GFCF increased by 4.1% in Q1 2020, largely due to base effect, as a considerable decrease was measured in business sector investment in Q1 2019, when sale and export of aircraft took place following a bankruptcy of Icelandic airlines. Although these imports and exports are of importance in GFCF and external trade, the resulting impact on GDP is minimal due to the effects weighing against each other.
When including the effect of purchases of ships and aircraft, business sector investment increased by 9.5% in real terms in Q1 2020 compared with the same period last year, but excluding this effect, a 26.1% decrease in business sector investment was measured during the quarter. Government investment increased by 2.5% in real terms in Q1 2020, respectively for Q1 in the previous year.
Residential investment set to decline
Although residential investment (GFCF in dwellings) in the quarter is substantial from a historical perspective, investment declined by 3.2% in real terms in Q1 2020 compared with Q1 2019. Over the last four quarters, the growth in residential investment has mainly been due to an increase of housing in the last construction phases while simultaneously the issuance of building permits, which has generally been considered a good indicator of the expected trend in residential investment, has declined as well as housing in early construction phases. The number of building permits issued decreased by 37.5% in Q1 2020 compared with the same period last year, however, the number of housing in the final phase of construction has not been higher since 2008.
Negative impact from external trade
A decrease was measured in most components of external trade for Q1 2020 and due to a greater decrease in exports than imports, external trade contributes negatively to GDP growth. The largest decline was from the export of services, which can partly be attributed to the impact of the Covid-19 pandemic on international tourist arrivals in Iceland. The impact of the pandemic is though also evident in other components, such as imports of services. The total export and imports of goods were 150.2 and 168.8 billion ISK, in Q1 2020 respectively for the same period. The deficit in the balance of trade in goods was 18.6 billion ISK and the surplus in the balance of trade in services 24 billion ISK with total exports and imports of services measured as 115.5 and 91.4 billion ISK.
Seasonally adjusted figures
Seasonally adjusted GDP fell by 7% in real terms in Q1 2020, compared with Q4 2019. Seasonally adjusted private final consumption expenditure grew by 0.2%, government final consumption expenditure was constant between the quarters and gross fixed capital formation grew by 13.6% in Q1 2020 compared with the previous quarter. Seasonally adjusted figures for exports show a decreased by 14.1% and 4.6% for imports compared with Q4 2019.
| Quarterly national accounts, 1st quarter of 2020 | |||
| Current prices million ISK | Volume change on the same period of the previous year, % | Volume change from previous quarter, % | |
| 1st quarter | 1st quarter | 1st quarter | |
| Private final consumption | 363,178 | 0.9 | 0.2 |
| Government final consumption | 181,577 | 2.3 | 0.0 |
| Gross fixed capital formation | 129,318 | 4.1 | -13.6 |
| Changes in inventories | -1,420 | 0.9 | … |
| Gross domestic final expenditure | 672,654 | 2.9 | -2.6 |
| Exports of goods and services | 265,706 | -17.2 | -14.1 |
| Imports of goods and services | -260,229 | -9.7 | -4.6 |
| Gross domestic product | 678,131 | -1.2 | -7.0 |