ARE WE DOING ENOUGH TO REVIVE CONSUMER CONFIDENCE?Muhammad Shahid
A key concern for policy makers and businesses alike is COVID-19’s impact on the economy with regular lockdowns and other measures implemented to curtail the pandemic. The Economic Survey of Pakistan 2020 reports the provisional GDP growth rate for FY2020 estimated at negative 0.38 percent. The negative performance of both Industry (-2.64%) and Services (-0.59%) is expected to overshadow the growth in the agriculture sector (2.67%). As a leading player in the construction sector, it is worrisome that the provisional growth in the industrial sector was estimated at -2.64 percent mainly due to decline of 7.78 percent in large-scale manufacturing sector.
Copper prices sank by more than a quarter from January to mid-March, hitting a low of USD 4,600 per ton when covid-19 spread across China, which accounts for about half of global copper consumption. Recently, efforts to stimulate China’s economy may be paying off. In June, demand for copper in China rose by 5.5% on the year, its biggest jump in over two years. Copper has surged further in July, climbing to around USD 6,500 per ton. There is a view that rising demand backed by curtailed supply from South America due to COVID related disruptions is driving up the price of copper. While there are several fundamental variables that drive copper prices, industrial demand is certainly a key element. Is the recent rise in copper predictive of an economic bounce back?
The pandemic has given a boost to certain industries globally with food items, medical supplies and e-commerce categories being the leading beneficiaries. On the other hand, industries related to travel have suffered considerably – United Airlines described the second quarter as the most financially difficult in its 94-year history.
Even prior to the impact of COVID, business activity in Pakistan remained slow during the first quarter of FY 2020 amid rapid depreciation of the Rupee, climbing interest rates and debates over energy crisis as the government grappled to come to terms with an IMF driven economic road map. Covid-19 only fueled the fire that erupted months ago. In January 2020, IPSOS Survey indicated that 79 per cent of the respondents were pessimistic in their outlook for local and national economy. Well before the outbreak, consumers across rural and urban Pakistan grew less comfortable in purchasing basic household items or making major purchases such as a car or home.
Pakistan has a tough job because our output has fallen more since March, when lockdowns were imposed. The lifting of lockdowns was expected to boost economic activity but it varies from country to country. For instance, by the end of June, economic life in Denmark and Norway had pretty much returned to normal. Norway took just ten days to halve the intensity of its lockdown from its peak level. Pakistan, on the other hand, is taking longer to fight the outbreak effectively and therefore economic boom seems further. However, there are early signs of recovery and from an optimistic perspective, one would like to hope that the worst is behind us particularly as the rate of positive COVID and deaths in Pakistan have started to show signs of tapering off.
Besides, business activity and consumers’ confidence, a number of factors influence how fast an economy can bounce back: households’ finances is one. Poor saving rates on the back of double digit inflation and growing unemployment in Pakistan experienced before the pandemic had aggravated and pushed more people below the poverty line and widened the rich-poor divide further.
Government support has surfaced in the form of the Rs 1.2 trillion-recovery package injected to stimulate the economy backed with relief on the policy rate and several other steps taken by the State Bank of Pakistan to support the economy. This is an encouraging approach but it is yet to be seen whether it will help offset the severe impact of the pandemic.
Ambitious development plans promising much needed economic activity such as “Naya Pakistan Housing Scheme” and “Kamyab Jawan” have so far been mostly on paper and the building materials sector is eagerly awaiting the momentum to pick up and for these programs to become a reality. In addition to this, the construction package announced in the budget allocates Rs. 30 billion to the real estate sector. There is a great amount of skepticism around these plans, as consumer confidence is already depressed and the political nature of the projects does not necessarily help overcome this. Having said that, preliminary numbers for cement dispatches (a leading indicator for the building materials sector) have been strong for the month of July.
All this is nothing without consumer confidence. If consumers are fearful, then lifting lockdowns makes little difference to economic outcomes. Drastic measures for boosting spending, creating investor friendly opportunities and supporting local manufacturers are just some areas that should be explored by policymakers to help revive the otherwise fragile consumer confidence can be. The government and businesses need to collaborate effectively to stirring Pakistan’s economic activity and build consumer confidence otherwise, the recession may prevail longer damaging economic, social and political stability.