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Business Confidence is Falling

The Innovation and Technology Centre (ITC) of the Lahore School of Economics recently completed its 2019 Business Confidence Survey which is a survey that has been annually conducted since 2014. This year’s survey was conducted with 500 large, medium and small sized firms registered with the Lahore Chamber of Commerce. The sample comprised of firms from three different sectors including manufacturing, services and retail.
The survey provides a unique opportunity for businesses to share their concerns about the prevailing business conditions. The results of the survey represent the feedback received from firms across a variety of sectors in the Lahore region and shed light on a number of key business parameters such as firm revenues, firm investment, firm employment levels and firm perceptions about the performance of the Pakistan economy over a 11 month period from October 2018-August 2019. An increase in the any index suggest an improvement in how the firms is performing whereas a decrease in any of the indices indicate a deterioration in firm performance. The overall business confidence index combines all of the individual indices and an increase in the business confidence index shows greater optimism about the economy while a decrease in the index shows greater pessimism about the overall economic activity in the country.
These indices were constructed to predict the directions in which the economy is moving as well as to highlight those factors which were playing major role in economic activity. These indices are critical for policy makers, government officials and the business community since they can be used as a leading indicator for monitoring and forecasting changes in the economy.

Business Confidence Monthly Indices

The timeline of monthly index shows that there is an overall decline in the index. The declining trend is mainly coming from the decline in the perceptions amongst the business community about the performance of the Pakistani economy. At the firm level, the most significant decrease was in the employment index which shows that overall employment in the businesses has fallen. The investment index also shows that firms have decreased their investment in the most recent months.
Looking at the indices that looks at future expectations, that expectations started out as relatively positive but have fallen dramatically in the last 6 months. This decline in expectations were mainly coming from the negative perceptions about the performance of the Pakistan’s economy followed by pessimism about the amount of expected employment levels. Perceptions from firms about their revenues has fluctuated significantly. The only real silver lining is that expectations about future investment seems generally positive.

Another monthly index was also constructed based on the responses on the level of investment and bank borrowing by the respondent firms. The index shows that investment has fluctuated and after an increase in the early months of the year, there has been a fall in recent months. The index also shows that while bank borrowing by firms fell dramatically over the early months of 2019, there has been a slight recovery over the summer months.

The third monthly index was constructed plotting firms’ responses about revenues, employment levels and the perceptions about the performance of the Pakistani economy. This index shows that all three parameters decreased significantly, however the largest drop was seen in the perception about the performance of the Pakistan economy reaching the lowest level in July 2019. Whereas, the revenues fell but have shown a slight improvement after June, 2019.

Overall Business Confidence & Business Expectations Indices

Overall Business confidence was measured by combining the indicators for sales, investment, employment and overall economic condition. The Business Confidence Index also measured the level of confidence amongst different groups about the statement of the Pakistan Economy. Overall, the business confidence has declined as compared to previous year. The graphs on the comparisons of overall actual and expectations index reveal that the overall actual index remained higher than expectations from 2016 till 2018, however the expectations index has fallen after 2018 till 2020(based on expectations).
Sector-wise comparison of indices showed that the decline in business confidence is mainly coming from the retail sector which was most optimistic during the previous years. Similarly, the manufacturing sector and exporting firms have shown significantly higher pessimism as compared to the previous year.

Sector wise Indices

On the whole, the Lahore School business confidence survey showed that firms remained skeptical of many of the recent economic reforms. This means that businesses have reduced employment and bank borrowing and this will only recover as the business community regains confidence in the economy and current economic reforms.

This article has been written by Dr. Azam Amjad Chaudhry, Professor & Dean, Department of Economics and Ms. Saman Khan, Research Fellow, Innovation & Technology Centre, Lahore School of Economics

Link to the Article in the Express Tribune