Dip in Perceived Economic Opportunity Index persists

For the second consecutive month, the Perceived Economic Opportunity Index (PEOI) has recorded its lowest level since its inception in July 2011. At 1.56, the fall in February however was marginal from January, but very significant since the seven month high of 1.77 due to the post-Budget upward movement in November.

The PEOI, compiled by Foundation for Economic Freedom in Sri Lanka (FEFSL) has now moved well below the midpoint of 2.0 and very much into the relatively pessimistic territory.

Policymakers must take note of this alarming drop in optimism as it is a leading indicator of the economic outturn. Even though constructed in a simple and unsophisticated manner the PEOI seems to have captured well the falling optimism throughout 2012 which certainly would have contributed in the slowdown of economic activity and opportunity which is now being confirmed in terms of a significant reduction in economic growth; falling from 8.3% in 2011 to just 6.4% in 2012.

With official inflation remaining at almost double digits and prices set to rise once again with the expected tariff revision in electricity and the likely second round effects the expectation of optimism rising in the near term is suspect.

The PEOI is calculated on a monthly basis using a random sample of 100 persons based on seven questions: one each on income, saving and cost of living; one each on law and order, media freedom and corruption; and one question on opportunities to advance in the respondents job, profession or entrepreneurial activity. The answers can only have three possibilities; the current situation with regard to each issue is worse than it was six months ago, the same or better than six months ago. A score of 3 is that Sri Lankans are becoming relatively more optimistic about the emerging opportunities while 1 is they are becoming relatively more pessimistic. A score of 2 indicates no change. Therefore, the trend is a more important indicator of changing perceptions than the absolute number.

The Perceived Economic Opportunity Index was developed and is measured by the Foundation for Economic Freedom in Sri Lanka in partnership with Friedrich Naumann Stiftung Fur Die Freiheit. Fieldwork is carried out by market research agency PepperCube Consultants.