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articles | 24 January 2018 | KPMG Limited

Consumption as an Economic Indicator

The way consumption unfolds, gives an important indication for an economy’s health level and at the same time it reveals the consumer trends over spending. However, it should be noted that the data published takes also into account the 'imported consumption' - generated by foreign visitors - and therefore further analysis is required as to whether and in what extend the dispositions of the domestic market are reflected through these data.

For example, while consumption indicators are improving, at the same time the Economic Sentiment Indicator, according to the latest update, follows a negative trend. Of course, the indicator does not only demonstrate current market conditions but also business estimates of the economy.

In addition to the mood of the consumers, consumption is also affected by liquidity and the disposable income of households. Following the 2013 events, as expected, those indicators relating to the volume and value of retail trade turnover decreased significantly, alongside with the imports. On the one hand, the withdrawal of large amounts of deposits/liquidity from the system and, on the other hand, the forcible change of consumer habits, eventually led to reduction in demand.

This has resulted in a turnover decrease in many businesses, while at the same time their borrowing was, and may still be, at very high levels. As a result, there has been an increase in unemployment and the overall business management, with the so-called real economy being severely damaged. The fiscal measures taken, such as the tax increases and the government spending cuts, contributed to this outcome as well.

There have been improvements in consumption indicators in 2017, driven by the improvement of the economic climate, the abolition of the measures imposed on households (such as the salary and pension contribution as well as the real estate tax) and the gradual increase of liquidity through the increase of foreign investments and the strengthening of the rate - in regards to the new loans given from banks.

As already mentioned, part of the consumption sphere relates to the visitors of a country. According to the latest data over the credit cards usage, in the first six months of 2017, foreign tourists spent almost €400 million in Cyprus, amount accounting for 24% of total purchases. The growth of tourism strengthens consumption, although the impact of this boost may be disproportionate since, according to tourism-related entrepreneurs, tourists coming to Cyprus may belong to a lower salary-base compared to those who came in the past.

At the same time, government expenditure is higher, which also boosts consumption. This is mainly due to new recruitment wages. The country’s annual budget is considered a major fiscal tool stimulating the economy, although in recent years due to the restrictions imposed, it cannot play an important role towards economic growth; therefore, the burden has shifted to the private sector.

The increase in consumption is usually coupled by rising prices. According to the latest data derived from the Statistical Service for the period January - August 2017, the Consumer Price Index recorded an increase of 0,9% compared to the corresponding period last year, despite the fact that in August there was a 0,2% deflation.

Further statistics reinforce the trend of improving consumption indicators, such as the increase in vehicle registrations and the revenue enhancement coming from indirect taxes, for instance, VAT.

It is important to note that following the events of 2013, citizens' consumption habits have changed, mainly due to the reduction in the households’ disposable income. Consumers’ shopping is far more careful, while many are now conducting market research before actual shopping takes place. The gradual recovery of the economy and the strengthening of households’ income may lead again to new changes in their habits, reinforcing even further the consumption indicators.

Author: George Andreou, Board Member, KPMG Limited

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