The economy is on the mends, or so you are told. But the consumers are not having any of it. How they view the current and expected economic conditions, in the midst of what is a stability journey, is troubling to say the least. The Consumer Confidence Index (CCI), as per the latest wave of the SBP-IBA Consumer Confidence Survey, returned its lowest value in 10 months – and the sharpest month-on-month fall since July 2022 (right after the Vote of No Confidence, at the height of political uncertainty).
Consider this. The 9 percentage point month-on-month drop in Consumer Confidence Index during July 2024 is the second sharpest fall ever and the sharpest since July 2022. The index value at 31.8 represents a massive 22 percent month-on-month decline in CCI. The 12-month average month-on-month change is 2 percent. The diffusion index under 50 represents negative views are more than positive views and vice versa).
Why the sudden drop in confidence one may ask, especially when inflation reading for July 2024 was among the lowest in a very long time. The answer rests with the budgetary measures that have led to a drastic reduction in real wages for a large segment of the society. Administered energy price adjustments, as part of the IMF program, have been a big dampener to consumer confidence, as evident from the recent round of electricity bills that has stoked anger and protest across country. The government’s intent to impose higher Petroleum Levy (PL) in FY25 also seems to have dented the confidence, although the increased PL is yet to be levied.
More than most other factors, it is the massive increase in effective taxes on salaries that seems to have intensified the pessimism among consumers. Recall that income tax for most slabs were revised upwards in an economy that is still struggling to come out of the pits. While food inflation has come down significantly from a year ago, the impact of last 24 months on real income is too big and consumers are struggling to make the ends meet at a time when real wages for most have gone down.
A similar drop is witnessed in Expected Economic Conditions (EEC) Index, that dropped by 8.2 percentage points in July over June 2024. Consumers, over the years, have had a better view of the next six months than the current economic conditions, and that trend has continued in July 2024. That said, the differential between current and expected economic conditions has narrowed to a multi-month low of just 1 percentage point.
Decomposing the index, it is shocking to see that a colossal 77 percent of respondents have a negative or very negative view on overall economic conditions. This is up from 57 percent respondents with negative views in the previous wave just last month. This is also the second highest number in terms of negative views on overall economic conditions, the lowest being September 2023.
Inflation Expectations Index has also changed for the worse form 65 percent in June to 72 percent in July. The view on income a year later paints a dire picture at 48 percent – the lowest diffusion index value in a long time. Even back in September 2023, when the overall CCI was at the lowest ebb, the view on income a year later was still in the positive territory. This is the first time in many waves that the consumers’ view on income in 12 months to come has landed in the negative zone.
For a politically weak government, time is running out. With the IMF program coming up, it will be a tough ask to anchor inflation expectations. Any attempt to offer relief in energy prices or income tax is likely to be met with contempt from the IMF. In that light, the SBP’s cautions stance on the monetary policy, despite room for a bigger cut, makes more sense.
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