HOUSEHOLDS REIN IN A RUNAWAY RISE IN EXPECTATIONS
The BSE-CMIE-UMich Consumer Sentiments Index rose 2.2 per cent in the week ended February 19. This is a healthy increase given that it comes on top of a 1.7 per cent increase in the preceding week.
The uptick in consumer sentiments index in the recent weeks reflects an improvement in the households’ perception regarding their current economic conditions. In comparison, their assessment of their own future prospects has been less optimistic.
This relatively lower enthusiasm regarding their future is in contrast with the trend seen through the second half of 2016. During the second half of 2016, households were very optimistic regarding their future well-being in spite of a lower assessment of their current well-being.
Data of the last two weeks indicate a possible reversal in the assessment of the households of their current and future well-being.
The Consumer Sentiments Index has two components — the Index of Current Economic Conditions (ICC) and the Index of Consumer Expectations (ICE). The former is a summary of two questions — compared to a year ago, is your household better off, worse off or the same and, do you think that this is a good time (or not a good time) to buy consumer durables? The latter assesses the households views on its one-year and five-year income growth prospects and the perception on the general economic conditions in the country in the next five years.
During the past year or so, the ICC has under-performed the ICE. This means that although households have not been doing very well through most of the year, they had continued to keep their hopes higher on the future.
This difference was accentuated during the second half of 2016.
During the first half of 2016, the ICE was, on average, 0.47 percentage points higher than the ICC. The difference wasn’t much, then. The ICC averaged at 92.28 and the ICE averaged at 98.75. In the second half of the year, a divergence set in. The average index for current economic conditions fell (97.9), but the index of expectations soared (100.9). Now, ICE was, on an average, three percentage points higher than the ICC. The divergence had set in well before demonetisation. In September 2016, the ICE was five per cent higher than the ICE. This is the highest divergence in any month between expectations and current conditions.
What can we understand from this greater hope in the future in spite of sustained muted performance over most of the year? Is this faith? In a way, yes, because we always believe that tomorrow will be much better than today. And so, it is natural to expect consumer expectations to be better than their perceptions of their own current conditions.
But, this is not always true. Richard Curtin, director, Surveys of Consumers, University of Michigan, the oracle of consumer sentiments measurement and interpretation in the US, throws light on a very different situation in the USA. His presentation at the Economic Outlook Conference in November 2016 (Consumer Outlook: Goldilocks and the Bears) shows that the ICC and ICE have diverged substantially, with the ICE under-performing compared to the ICC. He analyses the situation as follows: “In today’s economy, the weaker Expectations Index is due to a growing consensus that interest rates and inflation will be higher in the year ahead.”
In India, the Reserve Bank of India just announced the end of easy money policy and there is a fear of inflation rising. So, does this explain the recent slower growth in consumer expectations compared to current conditions? Given that commercial banks reduced lending rates recently and inflation is still quite low in India to impact consumer sentiments, this is most likely an insufficient explanation for India at the moment.
It is more likely that the divergence between the ICC and ICE, which increased during the second half of 2016, had run ahead of reality and so it is now set to reduce. Rising expectations are being reined. In January 2017, ICC fell by 5.8 per cent. But, the ICE fell by a sharper eight per cent. In the last two weeks, while the ICC grew by nearly seven per cent, the ICC grew by only 2.1 per cent. Either ways, the gap between ICC and ICE is reducing. During the week ended February 19, the difference between the two was 0.1 per cent.