Bad vibes only

Sounding rather pleased with itself, in its latest statement of the Monetary Policy Committee (MPC), the SBP assuredly claims that “near-term external sector challenges have been largely addressed and investor confidence has shown improvement”.If the Central Bank means, confidence has grown from absolutely awful to slightly less so, it is accurate. Is this slight improvement meaningful? Let’s see. The IMF standby facility has likely averted (stalled?) the possibility of the country defaulting, there has been virtually no change in macro dynamics. Inflation is down, but still booming and there is knowingly a lag effect on monetary policy tightening. Large Scale Manufacturing is fatigued and private sector credit is shrinking. SBP’s own dual perception surveys—that it publishes each month targeting consumers and businesses separately—would burst any idealistic bubbles. The economy is on a decay.

Economists may debate but feelings can be damning evidence. A note to readers here: to follow this story better, check out the graphs. Surveys dating back the winter of 2017 suggest that businesses and consumers have very rarely seen eye-to-eye when it comes to their perceptions of the economy and how it is performing. Businesses also tend to be more“in their feelings“, slightly more-jerky in their reactions to new developments, their feelings largely more hopeful than one would expect. Consumers are more measured in their reactions, almost devoid of hope for the most part. Since Apr-23, business confidence is slowly improving but consumers are not totally buying it. In Jul-23 in fact, well after the IMF deal was inked, consumer confidence was down, month on month. Both consumers and businesses are predominantly unoptimistic about economic conditions(over six months), though consumers are much less confident than businesses.

Businesses are apparently also more trusting in the economic managers to control inflation. Again, consumers are not buying it. In Jul-23, inflation expectations have increased. For both consumers and businesses, expectation that inflation will remain prohibitively high remained elevated though, nowhere near the recordings in Feb-23 and Mar-23. The negative inflation expectations also suggest a gap in hard facts in the form of statistics (such as the CPI and WPI) and the way inflation has hit consumers and businesses, suddenly and purposefully which has affected their feelings. With inflation, consumers are also experiencing a rise in taxes and levies and fees, while wages are stagnant. The impact of inflation is felt more intensely than numbers would suggest.

A peak into the more detailed data provided by the SBP suggests firms demand for bank credit is growing while access to credit is plummeting. This what the firms are saying, and this is corroborated by SBP’s economic data. Considering the policy rate of 22 percent, the premiums charged by banks, and the risk averseness of financial institutions to dole out private sector loans when economy begins to tank, this doesn’t come as a surprise. The Purchasing Managers Index (PMI) estimated under the Business Confidence Survey shows upticks in PMI suggesting production and quantity of raw materials are improving. But at the same time, firms are reporting a substantive decline in average capacity utilizations (about 58% in Jul-23) and the firms’ own financial conditions.

Consumers are expecting unemployment to rise. And a deep dive into the perception survey for consumers indicates that buying appetite for durable household items, cars and motorcycles, construction of homes is at its lowest- lower than the covid period. Imagine this though, folks at home were more confident they could buy these goods when the whole world was in the midst of a global epidemic than they are now. Prices are rising and wallets are emptying. There may be “improvement” in investor confidence but hope has become a scarce resource.