Businesses and Households - the expectations chasm
Almost 60% of the businesses surveyed in the RBI’s quarterly Industrial Outlook Survey in June expect the business situation to improve in the next quarter. In the history of this survey (with the history going back to the year 2000) never have this high a proportion of businesses felt optimistic about the economy. Thus, more businesses are optimistic about the economy currently than they were just after the demonetisation or global financial crisis. On both these occasions, the economy had seen a ‘V’ shaped recovery.
Also worth noting is that the expectation in the previous round of the survey (March quarter) was already the second-highest since March-2000. Those expectations did not materialize since the June quarter saw the impact of the second wave of the pandemic. But despite expectations being belied, and very badly belied, optimism has increased further.
As per the RBI’s Consumer Confidence Survey in July, only 40% of the households responded that the economic situation is likely to improve in the year ahead. While this is higher than during the preceding survey in May, it is lower than the in January and March and it is also lower than during the same period last year.
Thus, the business community (as proxied by the RBI’s Industrial Outlook survey) is very optimistic about the near-term economic activity in the country. In contrast, households are painting a very different picture of the economy. While households’ optimism over the economy has improved compared to May when the economy was amid the second wave, it remains well below the optimism during the March quarter or September quarter last year.
This divergence in outlook is starker when we look at the net response of respondents in both these surveys. Net response measures the difference between those expecting the economic situation to improve and those expecting the economic situation to deteriorate.
Thus, whereas almost 60% of the respondents in the Industrial Outlook Survey expect the business situation to improve, around 8% of respondents expect the business situation to worsen in the forthcoming quarter. On a net basis thus 52% of the respondents expect the business situation to improve. This is almost the same as in the preceding quarter and the highest since 2006. Thus, even on a net basis, business optimism is very high – both in absolute terms and historical terms.
In contrast, while 40% of the households expect the economic situation to improve in the following year, almost 45% of the respondents expect the economic situation to worsen in the year ahead. Thus, on a net basis, more households expect the economy to deteriorate than those who expect the economy to improve. In contrast over 50% of the respondents in the RBI’s Industrial Outlook Survey are expecting the business situation to improve.
So, what explains this wide chasm in economic outlook as perceived by businesses and consumers? Who will be proven right eventually – will consumers be positively surprised by the economy’s performance over the next few quarters, or will the business community be negatively surprised? Or is this divergence simply reflecting the fact that corporate profitability, at least for the larger corporates, is buoyant even as the broader economy is still struggling from the pandemic and thus both the perceptions reflect reality as the two are experiencing them? And what might be the implication of sustained divergence in economic performance as perceived by these two constituents?
A couple of caveats concerning the data:
First, there is a temporal difference between the two surveys. The Industrial Outlook Survey asks respondents on the outlook for the next quarter while the Consumer Confidence Survey asks respondents for outlook over the next year. However, unless households are factoring in a third wave of the pandemic, the outlook for the year ahead should either mirror the outlook in the next quarter or be better.
Second, this being qualitative, all responses in both the surveys are treated equally. Thus, a respondent being very optimistic about the economy and another respondent being slightly optimistic are both treated equally. The very optimistic respondent does not get extra weight in the survey. Thus, the survey measures the breadth of optimism and not the intensity of optimism.
Lastly, the RBI’s Industrial Outlook survey was conducted during the month of June while the Consumer Confidence survey was conducted during the month of July. But at the margin economic situation has improved in July relative to June and thus outlook should have been brighter in July than in June.