BR RESEARCH: Cautiously unenthused: business and consumer confidence

If the past year has done one thing, it has reinforced a recurring truth about Pakistan’s economy: that sentiment moves slowly, and when it moves at all, it moves unevenly. Businesses and consumers in Pakistan occupy different emotional geographies when it comes to how they feel about the economy, and where it is headed. And the two economic agents rarely are on the same plane.

The latest readings in the business and consumer confidence surveys of the SBP suggests that without either side becoming suddenly more optimistic about the direction of the economy, the two are settling into a gradual alignment shaped by fatigue and realism.

In the most recent survey cycle,consumer confidence improved slightly from 37.7 to 40 in October. Crucially, to remind the readers, this number represents a diffusion index which is interpreted on a scale of 0 and 100 where DI>50 would indicate more positive views than negative views and DI<50 would indicate more negative views than positive views. Broadly, if the index is below 50, it means, most respondents are pessimistic or hold negative views about the economic environment.

This means that while consumer confidence improved in this cycle, that it remains below 50 is an important consideration to remember. And if one were quick to dismiss consumers as always negative and always pessimistic, there have been times where this index showed an above 50 trends, though that time is not recent.

On the other hand, business confidence saw a modest pullback, sliding from 51.4 to 50.9, still mostly optimistic, but nothing too dramatic to write home about. Except the numbers do offer clues about the broader mood. Since the Monetary Policy Committee began easing interest rates last year, both firms and consumers showed a tentative climb out of pessimism. But that incline was short-lived and has more or less flattened. For firms, the climb never gained altitude; business sentiment hovered in the low-to-mid-fifties for moths, a range that does not signal renewed vigor. October completes that thought. Firms are not enthused right now.

Part of this muted response is due to the macroeconomic balancing act that is underway. Despite cuts, the policy rate is still in double-digits where it has been for the past four meetings as the Central Bank attempts to maintain positive real rates in the 3-5 percent range. According to the last MPC meeting, the committee noted that while overall macroeconomic outlook had improved,“uncertainties around outlook arising from volatile global commodity prices; challenging export prospects amidst the evolving tariff dynamics; and potential domestic food supply frictions” were reasons to give pause.

Businesses that had initially welcomed falling borrowing costs are now brushing against the patience threshold. But if a conservative monetary policy yields a stable current account and a less volatile exchange rate, that ultimately protects firms, even if the short-term pressures on credit costs feels acute.

Consumers, meanwhile, remain more sensitive to the realities of inflation than to the technicalities of monetary policy. Though rise in auto financing and an upcoming mark-up subsidy on housing loans is reinvigorating consumer financing more than broad sentiments indicate. Overall inflation has remained dramatically lower than a year ago, and this cooling off may have helped lift consumer sentiments from their most depressed levels. Even displaying an uptick in the October cycle but like earlier said, a mid-30s to low-40s is hardly a sign of robust confidence or a recovery towards it.

The floods that damaged crops earlier this year have already nudged expectations upward; consumers believe price pressure will return. Inflation expectations index for consumers actually rose from 69.9 to 71.1—farther away from the point of neutrality at 50.

Though businesses too feel the pinch of higher costs when inflation rises, in an economy where firms enjoy pricing power, they also manage to stay afloat during periods of weak demand by passing on their costs to their customers. Large firms operate with cushions — access to cheaper credit lines, better foreign exchange management, and regulatory predictability that smaller businesses and households seldom enjoy. Meanwhile, households especiallythose in the middle-income bracket face the economy unmediated.When inflation rises and spending shrinks, firms are forced to hold off on wage increments, reduce working hours of their labourers or resort to lay-offs. With tax burdens growing, consumers remain exposed to high inflation long after it begins to soften. The erosion of purchasing power during the past three years was not just mathematical; it was psychological. Even when inflation has fallen, expectations are recovering more slowly, and caution continues to dominate household decisions.

The other quieter story taking shape is one about resilience that is beginning to fray around the edges. Multinational exits over the past year have brought to light a hesitancy among investors about long-term policy stability. Cost of operating formally for international firms here are prohibitively high with the highest effective tax burdens compared to other emerging economies while informal firms and smugglers operate without impunityavoiding taxes and undercutting formal businesses. The deep structural issues within the economy do not inspire confidence in businesses; the domestic firms end up adopting a defensive posture rather than one of ambition while MNCs opt out.

The reading from the sentiment surveys confirm that businesses are no longer racing ahead of consumers. In fact, the two meet in a familiar middle, aligned in cautious realism rather than hope. Whether that realism becomes a foundation for recovery or a symptom of collective fatigue will depend on what the policymakers choose to do next.