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SBP is the cat that ate the canary. In its Post-MPC Analyst briefing two days ago, the SBP boasted about robust manufacturing growth (particularly in “high-frequency” indicators such as FMCG, cement, autos), improving inflation outlook as both food and core-inflation fell, and a strong external position. The Central Bank’s Covid-19 support measures for businesses and economy constitute 5 percent of FY20 GDP, so far. As a result, everyone is more confident. SBP says: “Business sentiment at an all-time high and consumer sentiment above its 3-year median”. Guess, that’s one way to look at it, since technically, that’s not incorrect.

But another way to look at it is that consumers are still pretty pessimistic and are not exactly optimistic about the future. Businesses however, are growing ever more confident. In fact, over time, the gap between business and consumer confidence has widened. Consumer confidence in Jul-21 is around the same as it was in Mar-20 when it was finally dawning on the country that it is hit with Covid-19. In the months succeeding that, consumer confidence plummeted. The trend for both economic agents (firms and consumers) is the same except businesses have shed their earlier pessimism really fast. Why does this discrepancy exist?

As argued earlier, confidence surveys are gut feelings (read more: “Growth Perceptions”, June 8, 2021). Respondents are not conducting an in-depth data-driven analysis when gauging how they “feel” about the economy at present or the direction they expect the economy to be moving. To a great extent, the information available to both type of respondents is the same. It is however, possible that since businesses are forecasting their demand-supply, and cost-price dynamics and are keeping a closer eye on government policies, their feelings are less tied to their guts, and more on concrete data. Or rather, their expectations are more calculated. Consumers are mostly looking at their incomes (wages) and inflation (cost of consumption or household expenditures). The rest—economic indicators like policy rate, current account position etc. –may all be background noise.

But assuming that the information is symmetric across the two respondents, it cannot be denied that recent government policies have been more business-centric, which are ultimately supposed to benefit consumers, but the impact likely is lagged. There are new policies such as automotive policy and smartphone policy that are expected to increase domestic production; construction and Naya Pakistan Housing Program which is meant to ramp up construction and demand for building materials (feeding demand to cement, steel, bricks, marble and tiles, furnishings and many other small and large manufacturers and service firms); and then there are refinancing schemes of the SBP running parallel such as TERF (1.1% of GDP worth loans availed by businesses so far for expansion and new projects) or loan restructuring schemes.

Ideally, these policy measures should increase employment and wages which should improve consumer sentiments. The SBP argued that private sector wages should rise during FY22 moving in tandem with the increase in minimum wage as well as public wages, even though they have remained muted for now. Evidently, consumers don’t think so. Businesses (from the business confidence survey) expect employment to increase in the near future. The diffusion index for expected employment in this period last year stood at 48, below the threshold of 50; now, in June-21, the score is 59, clearly indicating optimism. This perhaps will translate to higher consumer confidence in the coming months, if employment actually grows.

Consumers are also facing an unrelenting pressure from inflation. With stagnant real wages, and persistent higher prices for goods, there is not much reason for optimism. SBP projects inflation to decline to 7-9 percent during FY22 but consumer sentiments suggest their hopes are not hanging on prices falling anytime soon. They expect both food and energy inflation to remain persistently high. This does not contradict too much with inflation expectation of businesses. Historically, businesses are less pessimistic than consumers on inflation but both agents expect inflation to remain a tall order (though the industrial sector expects inflation to ease while services sector continues to have few hopes attached to prices easing).

A major risk now is the looming threat of covid-19’s fourth wave. If the deadly delta virus becomes unmanageable, it will ostensibly cause both business and consumer confidence to take a reverse stance. Barring that and its unforeseen consequences, the SBP expects economic growth to reach 4-5 percent next year. This should be complimented by a healthy rebound in real wages (wages adjusted for inflation or wages in terms of goods that can be bought). The onus of that falls on the private sector, which holds the baton and the power.


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