Business sector pessimistic about pace of growth
ISLAMABAD (July 05 2008): Economic growth is expected to decline during the first half of 2008 as about 80 of the main listed firms of Karachi Stock Exchange (KSE) interviewed by PIDE were of the view that the general price level and the rate of inflation is still alarming.
The perception of the business sector about the pace of growth of the economy in the first six months of 2008 is rather pessimistic, says a PIDE report here on Friday as the net balance remains negative. Keeping in view the previous assessment, as economic growth is expected to decline during the first half of 2008.
The financial sector, however, anticipates higher growth, whereas non-financial firms expect a lower level of growth. The analysis of expectations indicates the difference of forecasting about the level of growth during the remaining six months of the financial year.
The picture about the general price level and the rate of inflation is still alarming. Most of the firms reported higher prices in the second half of 2007, and they expect that these will be even higher in first half of 2008. The assessment seems to be uniform across all sectors.
The analysis reveals that both the financial and non-financial sectors neither experienced nor anticipated any fall in the general price level for the Year 2007-2008.
According to the report, the business sector perceived that the growth level of the economy during the second half of 2007 declined as compared to the growth level during the previous six months. However, there is a difference of assessment between the financial and non-financial sectors of the country. The financial sector perceived a stable growth, whereas the non-financial sector indicated a slower pace of growth.
These were the findings of the "Business Barometer" released by Pakistan Institute of Development Economics (PIDE) to biannually assess market perception of the economy in real terms, which is useful for policy makers. The survey mainly focuses on 80 firms listed with the Karachi Stock Exchange (KSE) dealing with large business.
Most of the respondents were in the financial sector, textile sector, sugar and allied industries, cement, oil and gas exploration, engineering, auto mobile assemblers, auto mobile parts and accessories, fertilisers, pharmaceuticals, chemicals, basmati and allied industries, fruit and personal care products and glass and ceramics.
Some 11% of the firms responded which gives a fairly good sample to assess the performance of these units. There were 15 respondents from financial sector, resulting in a separate financial sector assessment. Since the perceptions about future inflation and production investment are very vulnerable to any small political or policy shift, the survey uses a deviation factor to evaluate precision and accuracy of firm's future assessment of selected variables in the next 6 months.
In sum, we can say that growth has slowed down and inflation has risen from July-December 2007. Further decline in the growth level and a rise in the rate of inflation are expected during the current half of the year.
This implies that high actual prices negate the inflationary pressure sought to be curbed by the authorities, furthermore, high expected inflation highlights the need for bold decisions by the central bank to control it.
The problems of declining expected growth and rising inflationary expectations require co-ordinated efforts by the State Bank of Pakistan and the federal government.
In the case of business activities, the majority of the firms reported an increase in the actual and the expected levels of their production. It is found that the business sector's activities in the domestic market increased whereas firms have been facing problems in the international market.
However, firms are optimistic about their activities in both domestic as well as international markets. Moreover there is an increase in input and output prices, the rate of interest on deposits, and the interest rate on advances and wages. This upward assessment of the business sector is in line with high inflationary expectations.
The financial sector expects an increase in the rate of interest on deposits and the interest rate on advances and reserves, which is in line with the tight monetary policy adopted by the State Bank of Pakistan. Their future expectations about their activities are also high. The business sector expects the level of investment to be higher in the current half of the year. Investment is expected to affect the employment level, as expected employment of both sectors is also high.
So far as other macroeconomic variables are concerned, the majority of the firms reported an increase in their production, investment, and sales, both in the domestic and international markets. This is mainly driven by the higher expectations of the rise in the final product prices. At the same time, the firms' expectations of an increase in the input prices and the wage pressure is leading to the piling up of their inventories.
The employment levels are reported to be stable as the firms continue to operate below their full capacity level. The firms' plans to maintain the stability in employment also reflect the inadequacy of the skilled workforce, which is one of the major constraints reported by the firms. The leading constraints affecting firms' production are the regulatory environment and insufficient demand.
DECLINING ECONOMIC GROWTH The analysis shows that during the second half of the year 2007, economic growth declined as compared to in the first half of 2007. An analysis of the financial sector reveals that there are 50 percent, 35.7 percent, and 14.3 percent units indicating the same, lower, and higher levels of economic growth, respectively. But the non-financial firms see lower, the same, and higher growth (58.1 percent, 30.6 percent, and 11.3 percent) of firms, as compared to the previous period.
In terms of the perceptions of the business sector regarding economic growth during the first six months of 2008, 38.5 percent of firms reported that it would grow at the same pace. Also, 33.3 percent reported that it would grow at a slower rate, while only 28.2 percent expected that it would grow at a faster rate.
The analysis shows that the business sector expects variable levels of growth during the current six months of 2008. For this period, 54.5 percent saw slow economic growth, followed by 33.8 percent firms indicating the same level of growth. However, only 11.2 percent of the respondents indicated a faster growth in economy during the survey period.
The actual growth assessment of the financial and non-financial sectors is not different as the net balance of both sectors indicates a lower level of growth with different intensity as compared to the earlier six months.
Analysis of the financial sector reveals that there are 50 percent, 35.7 percent, and 14.3 percent units indicating the same, lower, and higher levels of economic growth, respectively. But the non-financial firms see lower, the same, and higher growth (58.1 percent, 30.6 percent, and 11.3 percent) of firms, as compared to the previous period.
A sector-by-sector analysis reveals the difference in the growth expectations of both the non-financial and financial firms. As can be seen from the net balance figures, the non-financial sector expects lowering of growth during the current period of the year, whereas the financial sector expects a positive trend.
In terms of their perception regarding the economic growth in the next six months, the percentage distribution of banks favouring higher, the same, and lower economic growth is 39.3, 25.0, and 35.7, respectively. In the case of non-banks, 25.4 percent, 41.3 percent, and 33.3 percent firms are expecting growth to be higher, the same, and lower than in the previous period, respectively. We may conclude that the financial sector is more optimistic about economic growth as compared to the non-financial sector.
INFLATIONARY EXPECTATIONS REMAIN HIGH The business sector feels that inflationary pressure was higher during the second half of the Year 2007 than during the first half of the year. About 96.2 percent of the respondents indicated that the general price level increased during the last six months of 2007, as compared to the first half of the year. Only 1.3 percent firms reported that it stayed at the same level, while 2.6 percent indicated that it declined.
HIGH PRODUCTION WITH INCREASING EXPECTATIONS: This shows that production has increased. The responses indicate that during July-December 2007, 42.2 percent of the firms had a higher level of production as compared to the first half of 2007. While 21.9 percent indicated no change in the volume of production, the rest of the firms (35.9 percent) indicated that their production was lower as compared to the first half of 2007.
Furthermore, the expectations of business firms for January-June, 2008 indicate that firms are optimistic about future production. In terms of the plans of the non-financial firms for the next six months, 57.1 percent expect their production to rise, 36.5 percent expect the same level, and 6.3 percent expect a fall in their production.
SALES INCREASED WITH HIGH EXPECTATION: The analysis shows that the non-financial sector is optimistic about sales in the domestic market as the majority of firms reported that domestic demand was expected to remain strong. The majority of the firms (43.8 percent) indicated that their sales in the domestic market during the second half of 2007 were higher than in the first half of 2007. 32.8 percent of firms recorded a decrease in their sales in contrast. However, there was no significant change in the sales of 23.4 percent firms.
The majority of firms (58.7 percent) expect that their sales in the domestic market would increase in the first half of 2008, 31.7 percent expect it to stay the same, while 9.5 percent expect a fall in their activity in the domestic market. The previous experience about realisation of expectations indicates that sales would be higher during the first half of 2008.
UNDER-UTILIZED CAPACITY: The evidence shows that the non-financial sector still has the potential to expand its production because most of the firms are working at less than the full capacity level. In response to the question about capacity utilisation, 21.3 percent firms reported that their capacity utilisation was 100 percent, while 75.4 percent of the business firms reported that their capacity utilisation was more than 50 percent, and the rest of the firms reported it at less than 50 percent.
Regarding the future course of capacity utilisation, 33.3 percent of firms expect to operate at full capacity during the first half of 2008, while 61.7 percent expect that their capacity utilisation will be more than 50 percent but less than full capacity. The rest expect to utilise less than 50 percent of their capacity.
FIRMS ARE BUILDING UP INVENTORIES: Inventories are building up, as most of the firms in the non-financial sector are reporting an increase in production. Most of the firms (56.5 percent) reported a rise in their inventories during the second half of 2007, 30.6 percent kept it at the same level, while 12.9 percent decreased their inventories in the second half as compared to the first half of 2007.
In the next six months, 41 percent of firms expect an increase in their inventory, 42.6 percent expect it to stay at the same level, while 16.4 percent expect a decline in their inventory. Furthermore, past experience about the expectations indicates that inventories would be even higher than what is expected, as the deviation in the respondents favouring higher inventories is 18 percent.
RISING INPUT AND OUTPUT PRICES: In the case of the prices of final goods, 52.4 percent of the respondents experienced an increase in the prices of their product during the second half of 2007. For 31.7 percent, it remained the same, while for 15.9 percent the prices fell from the first half of 2007.
The majority of the firms expect that the prices of their final products will increase during the first half of 2008. In the coming six months, 28.3 percent of firms expect that these will stay the same, 61.7 percent of firms expect that these are going to increase, while 10 percent expect a fall in the prices of their products.
Final product prices would be even higher than the expectations of the business firms, as deviation in the respondents favouring higher product price is 23 percent.
WAGE PRESSURE IS ALSO BUILDING UP: Wage pressure is also building up along with inflationary expectations. None of the firms experienced a wage decline in the second half of 2007, and 84.4 percent of the firms reported a rise in wages in the second half of 2007 over the first half of 2007, while 15.6 percent reported that the wage level remained the same during this period.
In the coming six months, 71.4 percent continue to expect wage inflation, 27 percent anticipate stable wages, and only 1.6 percent of them are expecting wages to decline in the coming six months.
INVESTMENT AND EMPLOYMENT:
HIGHER INVESTMENT WITH HIGHER EXPECTATIONS: The investment behaviour of the firms indicates that their investment plans are firmly positive, as 49.2 percent have increased their investment in the second half of 2007 as compared to the first half of 2007; 47.6 percent firms reported that it stayed at the same level. Only 3.2 percent firms reported a decline in investment.
For the first half of 2008, 50.8 percent firms anticipate an increase in investment, 49.2 percent predict no change in investment behaviour, while none of the firms has plans to decrease investment. In general, the investment situation is encouraging for the economy.
REGULATORY ENVIRONMENT-A MAJOR CONSTRAINT We also enquired about the constraints faced by the non-financial sector of the economy. 56 percent of the firms reported that their production was constrained by a variety of factors. Out of the constrained firms, 46.7 percent of the firms think that improper regulatory environment is the hardest constraint, followed by insufficient skilled workforce (31.3 percent) and insufficient demand (30 percent).
While 25 percent of the firms think that insufficient capital and insufficient access to imports create hurdles for business growth, insufficient access to credit is felt by only 8.3 percent of the business firms.
E-FINANCIAL SECTOR ACTIVITIES:
HIGH ACTUAL AND EXPECTED VOLUME OF DEPOSITS AND ADVANCES: The financial sector is optimistic about its production. The responses indicate that during July-December, 2007, 67.9 percent of the financial institutions had a higher level of deposits and advances as compared to that of the first half of 2007.
While 25 percent indicated that there was no change in the volume of advances and deposits, a small number of financial institutions (7.1 percent) indicated that their production was lower.
In terms of the plans for the next six months, 100 percent expected that their volume of deposits and advances would rise. The analysis demonstrates that the financial sector is optimistic about its future growth.
CREDIT INCREASED WITH HIGH EXPECTATIONS: Most of the financial institutions expanded their activities during the second half of 2007. About 83.3 percent of the institutions indicated that their activities in the domestic market during the last six months of 2007 were higher.
Interestingly, none of the institutions recorded a decrease in its activities, while 16.7 percent reported the size of activity in the domestic market to stay at the same level during second half of the Year 2007. Furthermore, all institutions expect that their activities in the domestic market would increase in the first half of 2008.
INCREASING ACTIVITIES IN THE INTERNATIONAL MARKET Interestingly, 45.5 percent of the respondents reported an increase in their activities in the international market during July-December 2007, as compared to the first half of 2007. 54.5 percent reported no significant change.
Regarding the future activities, the evidence shows that financial institutions are confident about the international market as 66.7 percent of the institutions believe that their activity would increase and 33.3 percent expect that there will be no change in the size of their international market activity. None of institutions expects a decline in its activity.
MAXIMUM CAPACITY UTILIZATION WITH LOW EXPECTED UTILIZATION The evidence shows that the majority (65 percent) of financial institutions are working at their full capacity, while 35 percent could not utilise their full capacity in the second half of 2007. As for the future, only 33.3 percent institutions are expecting to utilise capacity at one hundred percent, while 66.7 expect to work at less than full capacity during the first half of 2008.
HIGH EXPECTED RATE OF INTEREST ON DEPOSITS: Looking at interest rates, 36 percent of the respondents experienced an increase in interest on deposits during the last six months of 2007. As many as 56 percent of the respondents report that interest on deposits remained the same, while only 8 percent reported that the interest was lower in the first half of 2007.
For the next six months, 66.7 percent reported that the interest rate on deposits would stay the same, 33.3 percent expected that the interest rate would increase, while none expected a fall in the rate of interest.
HIGH ADVANCES RATE WITH STABLE EXPECTATIONS: The financial sector is feeling pressure on the interest rate of advances due to an increase in the deposit rate, wages, and other expenditure, which is forcing them to raise the prices of their advances.
Only 8.7 percent of the respondents reported a decrease in the interest rate on advances, whereas 56.5 percent indicated that interest on advances increased during the second half of 2007 as compared to the first half of 2007.
The minority of the institutions (ie, 33.3 percent) were expecting a rise in the interest rate, while 66.7 percent expect the interest on advances will be the same. None of the institutions anticipates a fall in interest rate.
HIGH ACTUAL AND EXPECTED RESERVES: The analysis shows that financial institutions are optimistic about their assets, as the majority of the institutions expect to maintain high reserves. As many as 92.3 percent of the institutions indicated that their reserves were higher than in the first half of 2007, 7.7 percent report that there is no change in reserves.
None of the institution recorded a decrease in reserves in the evaluation and expectation period. The majority of institutions (95.5 percent) expect that their reserves would increase in the first half of 2008 while 4.5 percent expect that the reserves would stay at the same level.
HIGH CURRENT AND EXPECTED EMPLOYMENT: Most of the financial institutions (71.4 percent) reported an increase in the employment level during the second half of 2007 as compared to the first half of the Year 2007. Only 28.6 percent reported that it stayed at the same level.
Only 14.3 percent banks are expecting stability in employment in the first half of 2008. Analysis reveals that there will be employment creation in the financial sector. Overall, there would be some increase in financial sector employment; this is in line with the general higher expectation of activities in the financial sector.
HIGHER ACTUAL AND EXPECTED LEVEL OF INVESTMENT: Stable growth and increasing investment in the economy are sustained by the investment behaviour of the banks. The majority of the institutions (75 percent) reported an increase in their investment in the second half of 2007; 20 percent institutions reported that it stayed the same; only 5 percent reported a decline in investment.
For the first half of 2008, 81.8 percent anticipate an increase in investment, 18.2 percent plan to maintain it at the same level, but none of the institutions reports a possible decrease in its investment.
Business Recorder [Pakistan's First Financial Daily]
