Issue 6, 2016. December-January



More shops and more shopping - looks into Georgians' increased spending and the potential power of consumer confidence.

Joseph Larsen

Georgia has been an economic success story for more than a decade. Annual GDP growth has averaged 5.8 percent since 2001. Growth has slowed since 2014, but there are encouraging signs around Tbilisi and elsewhere in the country.

Particularly evident is the growing number of options enjoyed by consumers: East Point shopping center opened earlier this year, and next year will mark the opening of Galleria Tbilisi, an 80-million-dollar shopping mall funded by the Georgian Co-Investment fund.

Exports count for a fairly low share of Georgia's growth basket, so consumption is crucial for economic growth. Consumption has risen rapidly over the past decade: average monthly expenditures per household rose from 382.6 lari in 2005 to 1,004.7 lari in 2015, an increase of 161 percent. GDP growth has tended to track fairly closely with growth in consumption; total output grew by 118 percent over the same period.

Many of the goods that Georgians consume are imported. Through September 2016, the country's current account deficit stood at 6.08 billion lari, already exceeding the deficit from 2015.

Expanding current account deficits often correlate with growth in imports and associated higher consumer spending. Imports to Georgia stand at 7.59 billion lari through the first nine months of 2016, looking likely to top the 7.73 billion in total imports the country absorbed in 2015.

Breaking Down the Consumer Basket

However, when considering that pharmaceuticals account for a large portion of 2016 imports— roughly 2.59 billion lari worth of medicine has been imported this year—rather than consumer goods, these statistics don't tell the real story about consumption.

Eva Bochorishvili, an economist in Galt & Taggart's research division, was candid about that in an interview with "Foreign direct investment is driving our current account deficit," she said. "Overall, consumer imports are down."

Middling growth, in addition to low consumer imports and low inflation, paint a picture of sluggish consumer demand.

This point was expressed by Bochorishvili: "Since the second half of 2016, prices are dropping. This is caused by three things: flat aggregate demand, low prices on international markets, and a correction from 2015 [when inflation was high due to the depreciation of the lari] ... Overall, aggregate demand is low."

Consumer Confidence Index Optimistic

While consumer spending growth has been slow since 2014, there are reasons for optimism. One indicator of better times ahead is the Consumer Confidence Index (CCI), a measure that is calculated each month by the International School of Economics at Tbilisi State University (ISET). The index is compiled according to survey responses by roughly 400 consumers.

Respondents are asked to answer a series of questions: how they expect their financial situation to change over the next 12 months, including whether they expect to spend more or less money in the near future and whether they expect to save money over the 12 months. The responses are then aggregated into a numerical index.

According to the CCI, consumer confidence began falling in late 2013, and it fell significantly during 2014. However, it increased by 14.8 percentage points from September 2015 to September 2016, a clear indicator that households are feeling better about their current and future situations.

According Laura Manukyan, an economist at ISET, upward-trending consumer confidence does more than say good things about the present. It can help propel future growth, too.

"Economic expectations have strong repercussions in the real economy, as they are typically self-fulfilling," she said.

"If people expect the economy to run hot next year, they will spend and invest, leading to the outcome that was expected. Likewise, if they believe a bank will go bankrupt, they will withdraw their money, leading to the very outcome they expected."

Official projections for GDP growth stand at 3 percent for 2016, and a weak lari continues to hold back imports. However, the fact that consumers are optimistic is itself a signal that things could be better in 2017, when the International Monetary Fund projects 5.2 percent growth. Such a figure would be Georgia's highest annual growth rate since 2012.

Another encouraging sign? Women have been especially optimistic of late, accounting for most of the rise in the Consumer Confidence Index over the past year. For Manukyan, this trend was both encouraging and surprising: "The positive turn in the CCI data was mainly driven by female respondents. However, we do not know the reasons behind it ... On average, women are considerably more pessimistic than men." For the sake of Georgia's future economic growth, optimism is welcome, whatever the reason.