Issue 3, 2013. June-July



ISET Policy Institute
April 2013
Lasha Labadze

Why does consumer confidence matter?

The Consumer Confidence Index (CCI) attempts to capture the expectations of consumers about the future development of the economy. In this way, the CCI can reliably indicate the current well-being of the economy and predict its short-run prospects. The reason is that consumption activity and savings behavior are driven by expectations - and, as economists like to say, expectations are self-fulfilling prophecies. Optimistic consumers are inclined to spend more money. This stimulates the economy, leading to a higher economic output. Expectations are fulfilled! Pessimistic consumers, on the other hand, cut down spending, and the decline in demand will affect the economy negatively. Again, expectations are fulfilled!

There is another reason why the CCI reveals something about the economic situation, a reason that is sometimes referred to as the "Wisdom of the Masses". Each single consumer may be quite ignorant about the state of the economy, as each is able to observe just a tiny fraction of the whole economic system. A shopkeeper knows how much was sold in the last month, the restaurant knows how many people were served, the employee observes whether a pay-rise was granted and whether there were layoffs in the company. The information is scattered in the economy- nobody sees the big picture - but all of it together is the big picture!

How does the CCI aggregate this information? People in the streets were shown a big sack filled with beans and were asked to estimate how many beans were in the sack. As it turned out, nobody gave the correct answer. Yet surprisingly, on average the answers came extremely close to the real number. Similar experiments were made with the weights and lengths of objects and other estimation tasks. It always turned out that on average, the estimations of the crowd were very close to the true values.

The CCI can also be considered an average of many individual estimations of the future development of the economy. None of them is right, but on average, these estimations provide a reliable prediction.

Consumer confidence in Georgia continues to climb

ISET's Consumer Confidence Index (CCI) and both its components - the Present Situation Index and the Consumer Expectations Index - increased in April 2013. The CCI gained 1.2 points, amounting to -6.4 points, up from -7.6 points in March 2013. The Present Situation Index increased by 0.6 points, while the Expectations Index climbed by a more significant 1.8 points.

What do these numbers mean? If one selects a random sample of 100 Georgians and asks them to assess their personal economic situation and the state of the economy as a whole, there will be some in this group who think that the situation is generally positive, some who consider it to be neutral, and some whose perceptions are negative. When our index has a value of -7.6 points, this means that on average, in such a sample of 100 Georgians, there are 7.6 fewer people who have a positive view than those who think that the situation is negative (neutral assessments do not count). For instance, a sample of 100 in which 30 people think that the situation is good, 38 think that it is bad, and 32 are neutral, would match our estimated average pretty closely. If we were to base the CCI exclusively on those 100 persons, the index would have a value of -8 points instead of -7.6. In reality we base our estimation on a sample of approximately 350 Georgians, which is one of the reasons why we end up with non-integer values.

ISET Policy Institute first launched the Consumer Confidence Index Survey in May 2012, thus we already have 12 months of data. In total, 3,864 unique individuals were interviewed all over Georgia during this period. Judging by our data, the overall CCI trend is positive. It is mainly driven by the Present Situation Index, which has experienced the most significant progress over time. The average level of the Present Situation Index in 2012 was -16.4 points, compared to -9.8 points in 2013. This is a considerable improvement, but it is still negative (the Index runs in the [-100; 100] range). The Expectations Index did not improve significantly over the last 12 months and roughly varied around -3.4 points. Expectations tend to be highly volatile, a good example of this point is the temporary hike in expectations seen after the parliamentary elections in 2012. Perceptions of the current situation, on the other hand, tend to be less subjective and are less influenced by mere opinions about future developments.

While the current negative value of the CCI index is highly problematic (at -6.4 level in the [-100; 100] range), it is still considerably better than it was for most of the previous months. In April 2013 the CCI measure is the third largest value since May 2012, after the highest value of -4.3, as recorded in November 2012, and almost the same level of -4.4 as recorded in February 2013.

In April 2013 an atmosphere of optimism and enthusiasm prevailed among considerable parts of the population. In April, as compared to March, Georgians mainly had relatively greater optimism regarding price developments. To the question "how do you expect prices to change in the next 12 months?" 56.7% of respondents answered that they will remain the same or even fall, while the same number was 50.4% in March. Interestingly enough, the index of this particular question (Question 6) switched from negative to positive territory after the elections of October 2012. Certainly this is due to the politics of the new government, which, despite maybe initially overestimating their abilities by announcing huge price decreases by the elimination of cartels and monopolies in different industries, clearly positively affected the beliefs of many Georgians with the later, sizable decline of natural gas tariffs and fuel prices. Stable prices over the previous year was also the main cause of the positive trend in the present situation; correspondingly, we have observed a constantly increasing index of past price developments (Question 5), which has been positive since October 2012. The second, most important improvement in the Expectations Index is due to expenditure on major purchases: 58.7% of respondents expect to spend the same or more money on major purchases, while this number was 55.6% in March 2013. Still, compared to March, in April more people think that it is not the right moment to make major purchases (Question 8).

Regional peculiarities

Changes observed in consumer confidence were totally different in Tbilisi and in the rest of Georgia. While the Present Situation Index as well as the Expectations Index increased in Tbilisi, both of them experienced a decline in the rest of Georgia. The Present Situation Index increased by 1.6 points (to -6.9 points) in Tbilisi, compared to a tiny drop (to -10.9 points) in the rest of Georgia. The Expectations Index also improved by 5.0 points (to -2.3 points) in Tbilisi, compared to a decline of 0.1 points (to -4.1 points) outside the capital. Thus, the overall CCI in Tbilisi was up by 3.3 points, while it declined by 0.1 points in the rest of Georgia. As a result, the gap between Tbilisi and the rest of Georgia increased to 2.9 points. Overall, consumer confidence is higher in the capital compared to the rest of the country (-4.6 points compared to -7.5 points).

Major geographic differences were observed in Questions 10, 11 and 12, with Tbilisi being in a better position in all cases. Question 12: the financial situation of households outside the capital is worse, with 59% of respondents reporting that they are running into debts, compared to 51% in Tbilisi. About 44% of Tbilisi citizens interviewed are just managing to make ends meet on their income or even save some money, while this number is a much lower- 34% -for rest of the country. Question 11: Georgia is essentially a society of pessimists, as we described in the previous month's CCI publication, but logically pessimism is higher outside the capital. 11.3% of Tbilisi's respondents report that they are likely to save some money over the next 12 months, while the same number for the rest of Georgia is just 4.9%. Question 10: in view of the general economic situation, 55% of Tbilisi citizens think that now is good moment to save money, while only 38% of population outside the capital think so.

Tbilisi falls back when it comes to price developments (Questions 5 and 6). Fewer people are satisfied with how prices have changed over the past year compared to the rest of Georgia. About 58% of Tbilisi citizens think that prices have remained the same or have even declined over the past 12 months compared to 66% outside the capital. Accordingly, fewer people (54%) in Tbilisi hope that prices will remain the same or fall over the next year compared to the rest of Georgia (58%).

The education factor

The Consumer Confidence Index differs significantly by the education levels of the respondents. The Expectations Index improved for everybody regardless of education, but the rise in expectations was less pronounced among people with higher education (0.2 points compared to a 4.0 point rise for people without higher education). The Present Situation Index moved in the opposite direction for these two groups: it increased for people without university degrees by 3.8 points (to -13.2 points) and decreased for those with degrees by 1.5 points (to -5.6 points). Thus, in April 2013 the expectation gap between people with and without higher education decreased slightly compared to March 2013, with educated people still considering their current situations to be better and being more optimistic for the future. The overall CCI for people with higher education amounted to -3.7 points (down by 0.7 points) while for the rest of the population it stood at -9.1 points (up by 1.2 points).

Significant differences were detected in the assessment of the present situation, with educated people exceeding in the majority of parameters. As usual, the most pronounced difference related to Question 8. Here, 36% of respondents with higher education think that now is an opportune time for major purchases, while only 23% of lower qualified people hold the same opinion. While the Present Situation Index of people with higher education has been consistently increasing since May 2012, it was decreasing for people without higher education until October 2012, when it started to increase, and after a significant decline in March, is now going up again. Overall, people with higher education assess their current and expected financial situations more positively. They have greater optimism and believe more firmly in favourable changes to the general economic situation.