The policymakers are sounding more confident today than they have been in a long time. From inflation to policy rate, from currency parity to foreign exchange reserves, and from current account balance to getting the IMF nod – all things point towards more stability. But people on the street do not seem to have received the memo. The Consumer Confidence Index (CCI), jointly tracked by the State Bank of Pakistan and the Institute of Business Administration, now monthly, returned its lowest value since September 2023.
It is remarkable that the CCI touched a 2-year high not so long ago in June 2024 – gaining 9 percentage points in four months of the General Elections of February 2024. And the journey from a 2-year high to a 12-month low took just two months, as the Index dipped to 31 – a loss of nearly 10 percentage points in less than three months. It is counterintuitive to see consumer confidence tanking to near-historic lows at a time when the macroeconomic indicators are seemingly on the mend.
The dip in July 2024 CCI, which was the highest negative change between the two waves, was understandable at many levels. Federal budget measures especially related to taxes on the salaried class, in addition to administered energy price adjustments, as part of the IMF program, proved to be the catalyst for a dip in confidence. But massive relief followed soon after, as federal and Punjab governments, offered subsidies on electricity to the tune of Rs100 billion for 1QFY25, for more than 80 percent of consumers.
In the meanwhile, inflation continued to drop – and August 2024 saw the first single-digit CPI entry in a long time, as inflation tanked to a three-year low. But surprisingly, none of that was enough to bring consumer confidence back. The answer may lie not with the rate of price change, but with purchasing power. While inflation has slowed down appreciably over the past few months, the erosion in purchasing power as real wages have failed to keep pace with inflation – seems to have dented confidence more than any other factor.
And this view is lent credence when one sifts through the details of the September 2024 Survey. More people have negative views than positive views of their income a year later - and the value is at the lowest point in at least a year. Answering questions regarding the suitability of time to purchase a durable item, vehicle, or property – the positive views are only 27 percent – again the lowest since September 2023.
The Inflation Expectations Index (IEI) continues to show negative views outnumbering positive – with no less than 73 percent of respondents having high inflation views for the next six months. This is understandable to the extent that Pakistan is nowhere near a deflation scenario. There is considerable change in consumers’ views of the rate of price change for the next six months – but the value is still elevated from the two-year lows of June 2024. Clearly, the inflation expectations are not that well-anchored even though data on the ground shows the pace of price increase slowing down rapidly. It is highly likely most respondents view things through the lens of real income and purchasing power when commenting on inflation.
On overall economic conditions, measured by the CCI, 74 percent of respondents have a negative or very negative view of overall economic conditions – only a 2-percentage point improvement from last month. In June 2024, only 57 percent of respondents had negative views on current and expected economic conditions.
With the electricity prices set to go up after the subsidy lapse, expect the inflation expectations to go further up, as energy inflation has historically driven overall inflation expectations. The central bank often cites confidence surveys in its respective monetary policy decisions, and seeing the latest wave, it is safe to say it would not be in a hurry to slash rates in a manner that the stock market enthusiasts have been demanding.
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