Life experiences, small or big, can teach us many things. Economics is all about connecting knowledge with observations and experiences.
The Incident at Wagah Border
Recently, I went to watch the Beating Retreat ceremony at Wagah Border. On the Indian side, the stadium was packed. The stadium is open for everyone and you can sit wherever you want. I got a seat somewhere in the middle.
I thought I won’t be able to see anything and I will have to stand throughout the show because I assumed that people will keep standing to get a glimpse of the parade or to create an Instaworthy reel. But that didn’t happen. If someone stood for more than a minute, people sitting behind them start yelling. I even saw an uncle explaining (I am sure he was a retired teacher) how he has to stand and because of that, people behind him have to stand too. Surprisingly, that person listened to him and convinced others to sit. I forgot about this incident until I read about the ‘fallacy of composition’ in Jonathon Tepper’s The Myth of Capitalism book.
The Fallacy
The fallacy talks about how certain things work at an individual level but not at a societal level. Any live event or sport is a common example. Imagine you are at an IPL match. It is normal and logical to stand to get a clearer and better view. But what if everyone stands? Then, nobody will have a better view and after some time, legs will start paining too, leaving everyone worse off. That uncle, in a way, had explained this fallacy that day, probably without knowing the technical name.
We can observe such things everywhere. Sometimes, they are too big to impact the whole economy. For example, it is normal and logical for a family to curb expenditure and save more during an economic slowdown. But if every family starts thinking the same and acting accordingly, that leads to recession. People start saving more due to fear of recession. But if all of us act, then, the fear of an event, which we are trying to shield ourselves from, hits us sooner. Keynes called this the ‘paradox of thrift’. It is nothing but a fallacy of composition. It is central to many problems in economics.
Listen to ‘fallacy of composition’, and its relationship with economics in Marathi on my new podcast episode –
Ep. 151
Wagah Border Parade and Economic Recession – वाघा बॉर्डर परेड आणि आर्थिक मंदी
We can relate this even to bank runs. Why people ran for withdrawing cash from Silicon Valley Bank? Because they thought if the bank shuts down, their savings will take a toll.
Jonathon Tepper (The Myth of Capitalism) refers to a statement by Mervyn King on bank runs. He writes, “Mervyn King, governor of the Bank of England, once noted that it may not be rational to start a bank run, but it is rational to participate in one once it has started. It is illogical for you not to pull your money out of a bank when you’re worried about the bank’s solvency, but it is also illogical for everyone to pull their money at the same time, as that itself brings the bank down.”
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But why are we talking about this today?
The Data
We have seen bank run a couple of months ago and there is some evidence of people curbing their expenses too. Whether economies will slow down or not? Whether it will be a technical recession? Will it impact developed markets only? If there is a recession, will it be a shorter one? Is the banking crisis over? There are bipolar opinions regarding all these issues.
In this article, I wanted to explore whether people across boundaries have curbed expenditures or not. That will determine the growth in GDP and give us a fair understanding of consumer sentiments and behaviours. One way to understand the situation was to look for the personal consumption data from GDP. But that data come with a lag. In such a fast-moving and evolving situation, nobody has the patience to wait for what happened a couple of quarters ago. Markets price most of the information in advance. Therefore, high-frequency (daily or weekly) or survey data becomes much more insightful in such a situation. We are more interested in knowing what people and companies have been doing in the past week or month and what are they likely to do in the near future.
Every central bank or central statistical body conducts consumer and business surveys to gauge the sentiment around. But collating such data for different countries is a time-consuming task. Such data might not be even fit for cross-country comparison too. I stumbled upon ‘Global State of Consumer Tracker’, a Deloitte survey which gives us a much better picture of consumers around the world. I would recommend everyone to play around with this dataset and gain more useful information from it.
So, what is this data all about? This is an online monthly survey conducted across 24 countries comprising 1000 adults in each country. It asks several questions like ‘Are you concerned about making upcoming payments?’, ‘Are you concerned about rising prices of everyday goods?’, ‘Do you purchase premium goods or otherwise?’ ‘Are you planning a vacation or leisure activity in the future?’ and so on and so forth. In this article, I will analyse three questions which, I believe, will help us understand the situation.
Are People Buying Branded Goods?
The left-hand side (LHS) of the chart shows the per cent of respondents who are buying store-brand goods (basically, unbranded or local goods) and the right-hand side (RHS) shows how many are purchasing popular brand goods. The assumption is popular brands are more expensive than store brands. If people are not buying a popular brand, then that means they are trying to save money and vice versa. Therefore, if you see higher values in LHS than in RHS, then more people are cautious about their spending.
This chart shows a clear demarcation between consumers in emerging markets (EMs) and developed markets (DMs). Consumers in EMs are more likely to consume a famous brand than those in DMs. Within EMs, consumer confidence has increased in India and China over the last six months. Mexicans, Brazilians and South Africans have turned more cautious.
Are People Buying More Essential Goods?
The design of this chart is similar to the above. The question asked in the survey was – are you buying several ‘nice to have’ items or prefer essential groceries only? China and India again top the chart. All other countries have a higher proportion of people sticking to essentials than non-essentials.
Inflation Concerns?
This chart is easy to understand. Here, we can see that most South Africans are concerned about rising prices, followed by UK and Australia. Chinese are least concerned about inflation given consistent lower inflation (<1%).
All in all, consumer confidence is waning in DMs (for sure) but is strong in select EMs. This does not mean that everything is hunky-dory in EMs. South Africa’s economy is in crisis. Rising oil prices pose a threat to inflation as well as current account balances. However, there is a higher chance that by the end of this calendar year, EM central banks can start cutting interest rates, which will catalyse the economy.
Confident Indian Consumer?
As seen from the charts above and commentaries right from the IMF chief to stock market experts, India, along with China, are shining spots in the gloomy world economy. Yes, there is no doubt that the Indian economy is more stable than its peers. But when you use a microscope to analyse Indian consumers, here’s what you find:
- 1% of Indians account for 45% of the total flight passengers
- Only 45 million (4.5 crores or 3% of the total population) are mature (or regular) internet users
- 6.5% of UPI users are responsible for 44% of transactions
- 1% of Indians take home 22% of total country’s income
Higher inequality leaves only a few crores of people who drive the Indian consumption story. Many experts argue that inequality is not a major problem, but poverty is, for sure and we should focus on addressing poverty more than inequality. I think that is a valid point but rising inequality can 1. saturate markets/sectors, 2. create chaos in society and 3. skew the data. Therefore, for every positive story, there will always be at least a negative one too.
Let us understand the trends in consumer sentiments in India deeper. RBI’s Consumer Confidence Survey shows us that sentiment is improving, which is a good sign. In the case of essentials (green colour lines), it has crossed the long-term average. It seems like the index has stabilised around it. But in the case of non-essentials (which includes consumer durables, motor vehicles, gold & jewellery, expenses on hotels & restaurants etc.), we can see that the current spending sentiment (dark blue line) is still below zero, which means people are very cautious while spending on such items. However, we can see that the future spending sentiment for non-essentials (light blue line) has peeped into a positive territory implying that people might start spending on non-essentials after a year. But it is so low that it might turn negative in case of any adverse news.
On Balance
People have started tightening their purses. There is no doubt that when the rubber hits the road, we will start protecting ourselves and our families from misery, even though it might be irrational for everyone to do so.
Coming back to the fallacy discussed at the beginning, everyone in the stadium will stand and watch the show. Nobody is going to see it properly, except for those in VIP stands. We will need security guards (policymakers) to control the crowd and bring order back.
Policymakers have realised that economies will contract soon and I hope that they are prepared (wishful thinking!) to deal with the fallout. And let us hope that the world will come out of it sooner than the earlier crisis.
Remember every 1% increase in GDP per head reduces poverty by around 1.7%
– Swapnil Karkare
Sources and Further References:
The Myth of Capitalism [Book] – Amazon Link
Fallacy of composition, Wikipedia
Global State of Consumer Tracker’, a Deloitte survey
RBI’s Consumer Confidence Survey – April 2023