ISET Economist Blog

A Temporary ‘High’? Improvements in Business, Consumer Confidence Should Not Distract Policy-Makers from the Long-Term View
Sunday, 19 June, 2016

In the year of elections, any piece of economic analysis is usually seasoned with a hefty dose of caution. Every analyst is aware of the fact that the incumbents will be too eager to oversell the ‘good’, while the opposition will pound on the ‘bad’. Weary of taking sides in political battles, economists usually switch on their primary defense mechanism: they start relying (heavily) on the annoying “on the one hand”, “on the other hand” kinds of phrases. I am of course referring to Georgia in the year 2016.

What people should keep in mind, however, is that in most cases the ‘good’ and the ‘bad’ economic news can rarely be attributed to any recent policy actions by the government. Policymaking is by definition a boring, drawn-out, long-term process. The consequences of many current government policies will be felt only in three, five, or even in ten years. They will not, in most cases, influence the well-being of the country here and now. Thus, instead of celebrating the current ‘highs’ or desponding over ‘lows’, the policymakers should adopt a long-term view. Easily said than done, of course. And as it happens, Georgia has been receiving good economic news in the last couple of months, giving a perfect excuse for the political incumbents to feel smug and even over-confident.

According to the ISET-PI recent press release, in the second quarter of 2016, the two most important economic barometers of consumer and business sentiment in Georgia – the Business Confidence Index (BCI) and the Consumer Confidence Index (CCI) – continued to steadily improve. Unlike in the previous quarter, when the BCI was riding high on the business expectations improvements, the business sentiment now was mostly driven by a significant improvement in actual business performance.

Overall, the BCI gained 10 points (on a [-100/100 scale]) compared to Q1 2016. The expectations of the private sector in Georgia improved and reached 46 index points (up from 38 points in Q1). Business performance over the past three months increased significantly and became positive, rising from -0.7 to 19.7, indicating a rise in production/turnover/-sales.

The Consumer Confidence Index gained 9 points (on a [-100/100 scale]) from January to June 2016. Although overall consumer sentiments remained at a low level, the improvement of the index since January 2016 has been significant. Both people’s assessments of their current economic situation and expectations have been increasing steadily and equally over the period.

In addition, the ISET-PI GDP forecast suggested that annual growth in 2016 is likely to reach 3.4%. While this figure in itself seems very low, it is higher than the annual growth forecasts for our immediate neighbors – Azerbaijan, Armenia, Turkey, and Russia. In the current circumstances, doing “better than the neighbors” is good enough for Georgia. The upper single-digit growth rates we enjoyed in the past decade are not returning to the region any time soon, due to low commodity prices, recession in Russia, and the slowdown of the Chinese economy.

Some of the economic indicators were, in fact, quite encouraging for Georgia in recent months. FDI was strong in the first quarter of 2016; remittances stabilized; international currency reserves of the National Bank increased, while the inflation rate remained low.

Tourism numbers were, even more, encouraging this year. The 15.3% increase in the international visitor numbers in the first 5 months of 2016 (including a 36.5% increase in the arrivals by air) spoke of the early start of the tourist season. Arrivals from Russia were up by 19.6%, thanks to the restrictions on popular travel to Turkey.

While all of these news sound pretty good, most (although not all) of the positive changes can be attributed to the period of recovery from the challenging year of 2015 and a bit of luck (Russian sanctions on Turkish travel). It is well for politicians to feel a bit smug and even gleeful, but the future of the Georgian economy does not directly depend on the current numbers of tourist arrivals from Russia or Iran.

The future will depend first and foremost on the success of the educational and VET reforms that would allow young people from the economically depressed regions of Georgia to receive quality education and enter the labor market. The future will depend on the adoption of laws that will make it easier for businesses to function; on the policies that promote the development of industrial clusters; on DCFTA harmonization laws that will help Georgian entrepreneurs reach European markets, while not harming the local production.

The Georgian society could also help steer the country in the right direction. We just need to make it clear to ourselves which policy battles are the most important ones right now – and act accordingly.

The views and analysis in this article belong solely to the author(s) and do not necessarily reflect the views of the international School of Economics at TSU (ISET) or ISET Policty Institute.