Worst is yet to come

Inflation and purchasing power erosion pinch is now reflected in volumetric sales’ reduction in products and sectors where double digit growth used to be a norm until just a few years ago. It is now clear that FY24 is going to be a much tougher year across the value chains. Last year (FY23) was one of the highest years of inflation in the country’s history, and that too with negative GDP growth. However, the pinch was not as bad as it is being felt now.

There was a momentum of two years of 6 percent growth and people were making money and had savings. Hangover from the economic successes of the twenty-teens lay heavy, and the consumption pattern did not change abruptly. However, this second year of 20 percent inflation is making life extremely difficult for many and miserable for some.

There are people without jobs, while most others are witnessing negative growth in their real income. The story is similar for employees, daily wagers, self-employed, and small businesses. The utility bills and transportation expenses are eroding the purchasing power further.

Lifestyles are changing - across the board. The upper middle class has cut down on foreign travel, buying new cars, furniture, and other expenses. Middle class has cut its domestic travel, eating out, downgrading from cars to bikes, and limiting other expenses. Masses are cutting down on everything.

The overall petroleum and electricity consumption was already down last year. Now the number is reflecting in many other items. For example, cola volumetric sales of both Pepsi and Coke are on a double-digit decline. There is a significant dip in the consumer health care sales of FMCGs. And the list goes on.

The domestic market volumes are contracting — be it formal or informal sector. The overall value chain is impacting. Producers are feeling the heat in terms of cost. However, many are not shying away from increasing prices — even in cases, the price hike is higher than the cost increase, which is evident by increase in gross margins of a few listed companies in the FMCG segment.

The value of sales has increased, and profits soared last year. The second round is not going to be easy for companies either. The distribution and retailing value chain is already facing the brunt. The distributors’ capacity to build inventory is falling. They are facing liquidity crunch, as value of the same volumes become too high and financing at this high rate is not viable.

The supply to the retail markets is shrinking. Then the end consumer is rationing consumption. Sales of essentials like wheat products and milk have not been impacted. But people are reducing discretionary spending, such as lowering use of consumer health care products. Numbers are showing the downturn.

The way things are, soon the hit is going to be visible in confectionery items, dairy products, tea consumption, and relatively essential items such as soap. And there are a variety of other products. The vibrancy of the Pakistan economy has remained in its retail and wholesale market which is almost 20 percent of the official GDP. And then it has a fair share of informal economy. It is the biggest employment provider in urban centers, and its slowdown would have a cascading impact.

The second biggest urban employer is the construction industry. There is visible slowdown — especially in the steel industry — is in a horrible situation. The real estate and construction constitute the most vibrant industry in the informal segment, and that is facing a severe squeeze.

The story of the formal sector is known to all. The LSM decline due to administrative measures was already visible last year, and there is a slight recovery in numbers. That is a deception, as demand was artificially suppressed, and now genuine suppression is visible.

The future looks bleak as the wider economy is contracting, and these kinds of contractions take time to recover. The impacts of rising inflation, purchasing power erosion and high unemployment are likely to last.

Copyright Business Recorder, 2023