"...[A] fool cannot be protected from his folly. If you attempt to do so, you will not only arouse his animosity but also you will be attempting to deprive him of whatever benefit he is capable of deriving from experience. Never attempt to teach a pig to sing; it wastes your time and annoys the pig." -- Robert A. Heinlein, American Writer
In this issue
BSP 4Q 2018 Consumer Expectations Survey: The Largest Collapse Since 2007!
-BSP Survey: The Largest Collapse in Consumer Expectation Since 2007! The Economic Linkage
-The BSP’s Consumer Survey from the Perspective of the CPI, Credit Flows and Domestic Liquidity
-If Consumer Spending Falls, What Happens to the Bubble Industries? BSP’s Business Sentiment Survey Also Skids
BSP 4Q 2018 Consumer Expectations Survey: The Largest Collapse Since 2007!
BSP Survey: The Largest Collapse in Consumer Expectation Since 2007! The Economic Linkage
The Bangko Sentral ng Pilipinas issued a very interesting Consumer Expectations Survey for the 4Q 2018 and 1Q 2019: (bold mine)
Consumer outlook continued to weaken for Q4 2018, as the overall confidence index (CI) declined to -22.5 percent from -7.1 percent in Q3 2018. In particular, the current quarter CI registered the lowest reading back in Q4 2014 and posted the largest drop by 15.4 percentage points since the nationwide survey started in Q1 2007. The negative index indicates that the pessimists outnumbered the optimists for Q4 2018. The CI is computed as the percentage of households that answered in the affirmative less the percentage of households that answered in the negative with respect to their views on a given indicator. A positive CI indicates a favorable view, except for the inflation rate, the peso-borrowing rate, unemployment and change in prices, where a positive CI indicates the opposite. The overall consumer CI measures the average direction of change in three indicators - overall condition of the economy, household finances, and household income.
From -7.1% to -22.5% or “the largest drop…since the nationwide survey started in Q1 2007”? That was a thundering crash!
Respondents attributed their bearish outlook during the current quarter to the following: (a) higher prices of commodities, (b) low salary/income, (c) increase in household expenses, (d) no increase in income, and (e)upsurge in the number of unemployed persons. Respondents also noted the occurrence of typhoon and other calamities in Q3 2018 as reasons behind their weaker sentiment for the current quarter.
So consumer confidence had been afflicted by the inflation, lack of jobs and inadequate income…
The less favorable consumer sentiment was carried to the subsequent reference periods as the next 3 months CI reverted to negative territory at -0.8 percent (from 3.8 percent in the previous quarter) while the next 12 months CI, although remaining positive, declined to 10.7 percent from 13 percent a quarter ago. Similar to the current quarter, the consumer outlook was less buoyant for the next quarter and the year ahead due to expectations of: (a) higher prices of goods, (b) low salary or income, (c) rise in expenditures, (d) no increase in income, and (e) high unemployment rate.
So the morose Q4 outlook percolated into the future (1Q 2019 and 3Q 2019).
I am no fan of surveys since they reveal not of the individual’s actual actions, but of expectations that may shift at the moment when individuals act.
Moreover, in the psychological prism, surveys usually incorporate social desirability bias or where respondents express sentiment designed to be “viewed favorably by others”.
In the economic context, consumer surveys are supposed to exhibit the Keynesian “animal spirits” or the confidence level that drives people’s actions (consumption savings or investments). If you wake up feeling good, you may go on a spending binge! And if a large number of people do so, the GDP grows! Or the opposite.
Surveys also form part of the rational expectations theory whereby, according to Investopedia.com, “people make choices based on their rational outlook, available information and past experiences.”
The general idea of these theories has been predicated on measuring and nudging of people’s animal spirits or market expectations towards the right direction. It assumes that actions of authorities can only be beneficial at most and neutral at least.
Moving on the survey, here are the reasons why it caught my attention: (figure 1, upper window)
1. The plunge in consumer sentiment represented an existing trend
2. The current data exhibit an acceleration of the decay or that the downtrend has been worsening.
3. Other economic data seems to support the BSP’s survey
Let’s dive into them.
Figure 1
While economics is supposed to be value-free, it would be hard to detach political events with economic data.
Has it been a coincidence that consumer sentiment peaked upon the advent of the incumbent regime in 3Q 2016, cascaded from then, and collapsed in 2018?
Has it been a fluke that the Philippine Statistics Authority’s (PSA) per capita on Household Final Consumption also reached its zenith in Q2 of 2016, turned south and has registered quicker declines in 2018? (figure 1, lower window)
Has record deficits and the big government bubble been “crowding out” the consumers?
Has funding and resources been diverted away from consumer goods and consumer goods related investments towards the government to spur the depletion of the consumer’s purchasing power?
What are excise taxes and expanded VAT? Are these not consumption taxes? Isn’t it that “when you tax something you getless of it (law of demand applied to taxes)?
So have the present policies been designed to redistribute wealth from the consumers to the government?
Ironically, the PSA tells us that the employment rate is at the near-record high of 5.0% in October. However, the BSP survey reported otherwise. Aside from price inflation, the principal reasons for consumer gloom were joblessness and inadequate income. The SWS’s 3Q jobless report also contradicts this claim.
I can only surmise that the PSA calculates their employment data based on the Philipps Curve. The Philipps Curve states of the inverse relationship between inflation and unemployment such that “with economic growth comes inflation, which in turn should lead to more jobs and less unemployment” (Investopedia.com)
Of course, the stagflation era of the 70s debunked the Philipps Curve. But it remains popular because of the political redistribution embedded in it.
It is for this likely reason the BSP’s survey clashes with the PSA. People could be saying differently from that of what the PSA’s models say.
And it has not just been per capita household spending, per capita GDP also partly reflects on such dynamics.
The pinnacle of the per capita GDP was in 2013. It has been downhill since. Though it rebounded in 2015, per capita GDP culminated its recent cycle with the onset of the current leadership. Since then, the decay in household spending gnawed at the per capita GDP.
So if consumers were pessimistic how would it affect their spending patterns?
Again from the BSP (bold mine)
The spending outlook index of households on basic goods and services declined to 42.3 percent for Q1 2019 (from 45.7 percent in the previous quarter’s survey results). This suggests that while more respondents continue to expect higher spending on basic goods and services, the number that said so decreased compared to a quarter ago, indicating that growth in consumer spending could slow down in the near term. Fewer respondents expected increased spending on food, non-alcoholic and alcoholic beverages, clothing and footwear, house rent and furnishing, water, electricity, fuel, communication, and restaurants and cafes.
How about the big-ticket items?
The percentage of households that considered the current quarter as a favorable time to buy big-ticket items declined to 24.5 percent from 26.4 percent recorded a quarter ago. The less sanguine outlook on buying conditions was evident across the three big-ticket items and is attributable to: (a) the shift of respondents’ spending priority on food and other basic needs (from big-ticket items), (b) high prices, and (c) low/insufficient income. Meanwhile, the percentage of those who intend to buy big-ticket items slightly decreased but remained broadly steady due largely to the steady buying intentions for real estate and weaker buying intentions for motor vehicles and consumer durables.
There will be less spending on groceries, department stores, appliances, cars and anything else but real estate!
If the BSP should reflect on actual actions, in the hope of increases in future spending, consumers are going to pare down consumption to gamble on real estate!
Such would signify a blatant misperception premised from expectations of generating “something out of nothing” at its finest!
The BSP’s Consumer Survey from the Perspective of the CPI, Credit Flows and Domestic Liquidity
Figure 2
If the surge in CPI backed by the temporal stimulus from cuts in income taxes boosted sales revenues of the retail industry in the three quarters of 2018, the plunge in November’s CPI to 6.0% from October’s 6.7% should likely deliver the opposite scenario. (figure 2 upper window)
Aggregate sales of listed Puregold, Robinsons Retail, SSI Group, Metro Retail, and Philippine Seven rose 13.15% in Q3 from 12.29% a quarter ago. (figure 2 middle window)
Paradoxically, because of mandated fare increases in public transportation and the likely lagging effects of food prices of food retailers, the CORE CPI surged to 5.1% in November from 4.93% a month ago.
Restaurant CPI increased to 3.16% in November from 3.07% while Transport CPI jumped 8.91% from 8.75%. The latter was mainly from mandated fare hikes on fares of public utility transports. A rollback on the latter would contribute to more decline in the CPI.
As I have been saying here, the yield curve of Philippine Treasuries has predicted the CPI slowdown.
The cynicism expressed by consumers in the BSP survey appears also backed by financial flows.
The growth of M1 (currency in circulation and peso demand deposits) dived to 8.92% in November, a January 2013 low from 11.4% a month ago. (figure 2, lower window)
When cash in circulation has been materially slowing, how will cash-based transactions be financed?
The growth in the banking system’s consumer credit has also been slowing meaningfully, growth in credit card loans eased to 21.6% in November from 22.19% a month ago. Bank credit growth for auto purchases dived to 14.23% in November from 21.91% last month. That’s a 768 basis points plunge!
The growth in salary loans climaxed in the 3Q of 2016. In November, salary loans (-.86%) registered its four straight monthly contractions! (lower window)
A considerable deterioration in consumer spending has been evident in both cash and credit conditions.
Figure 3
If income and job growth have been in a slack and if consumers have been taking up less credit, could consumers be drawing from savings?
That could be possible. Peso deposit liabilities growth fell anew in October to 9.49% from 10.38% in September, the lowest rate since December 2015. (figure 3 upper window)
The drop in peso deposit liabilities continues to dovetail with domestic liquidity conditions.
What continues to plague the banking system’s liquidity vacuum? The banking system’s industry credit portfolio continues to grow at a furious pace (+18.71% in October, 07.36% in September). (figure 3, middle window) Why has such growth not been converted into money supply growth? Because of surging closet NPLs?
Meanwhile, the growth in foreign currency deposits increased by 6.74% in October from 5.61% in September. (figure 3 upper window)
The decline in the banking system’s cash and due banks eased last October to -9.32% from -11.86% in September. The growth of cash and due banks to deposits ratio improved slightly to 19.69% in October from 19.36% in September. The growth of liquid assets to deposit ratio also rose marginally to 46% from 45.66% over the same period. (figure 3, lower window)
That said, consumer sentiment plus CPI plus credit flows and domestic liquidity conditions points to a substantial downturn in consumer spending activities.
All of these, of course, have been predicated on the accuracy of the government’s statistics.
If Consumer Spending Falls, What Happens to the Bubble Industries? BSP’s Business Sentiment Survey Also Skids
Nominal (N) GDP can be expected to meaningfully slow. The retail sector should bear the brunt of the slowdown in gross revenues.
Improvements in margins will not be a guarantee, considering the steepness in the increase in street inflation. Retailers may have restocked at higher prices. If retail prices remain sticky, this would exacerbate the shortfall in demand.
Repercussions from the slowdown in the retail industry should hurt both the banking and the real estate industry, despite the survey’s assertion that consumers will continue buying them.
Figure 4
With the “race to build supply” industries anchored on the trajectory of a perpetual robust growth, what happens if the consumers begin to increase demand for cash or liquidity?
And considering that the industry has been one of the principal absorbers of credit, what happens when demand slows?
Previously bank credit to the trade sector grew even as the consumer portfolio slowed, that divergence appears to have been resolved. Divergence became convergence.
Bank lending to the trade sector slowed to 19.91% in November from 22.71% a month back. (figure 4 upper window)
Even more, if consumers pullback, what happens to the growing imbalance between the discrepancy in the trade GDP/real GDP which continued to grow while consumer GDP/real GDP continues to fall? Will excess supply re-emerge and transform into losses that diffuse into credit issues for the banking system? How about bad loans of consumers? (figure 4 middle window)
Finally, it’s not just consumers that have turned glum. Business sentiment, according to the BSP’s Business Survey, has also become bleak. (figure 4 lower window)
Business outlook on the economy turned less optimistic for Q4 2018, with the overall confidence index (CI) declining to 27.2 percent from 30.1 percent in Q3 2018, the lowest level since Q1 2010. This means that the number of optimists declined, but continued to be greater than the number of pessimists during the quarter. The confidence index is computed as the percentage of firms that answered in the affirmative less the percentage of firms that answered in the negative with respect to their views on a given indicator.
Despite the expected uptick in demand during the Christmas season, business outlook was less buoyant for the current quarter due to (a) higher inflation driven by rising raw material costs and global oil prices, (b) weakening peso, (c) higher interest rates (i.e., borrowing costs), (d) decrease in volume of sales and orders, and (e) lack of supply of raw materials. The sentiment of businesses in the Philippines mirrored the less buoyant business outlook in the U.S., U.K., Australia, France, Hong Kong, South Korea and Thailand. However, business sentiments in Canada, Brazil, Hungary, and the Netherlands were more upbeat.
Respondents expected the less bullish business conditions to continue for the quarter ahead (Q1 2019) as the index remained positive, but lower at 29.4 percent from 42.6 percent in the previous quarter. This is the lowest next quarter reading since Q3 2009. Respondents attributed their weaker outlook for Q1 2019 to the usual slowdown in consumer demand after the holiday season. Moreover, sentiment of firms was tempered by expectations of a peso depreciation, which increases the costs of imports, as well as higher inflation and interest rates.
Aside from price instability and interest rates, ah, a “decrease in volume of sales and orders”. So deficiencies in demand have emerged!
Will the dour consumers drag the less sullen sentiment of businesses? Or will business sentiment pull up the consumers?
We certainly live in interesting times.
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