Elections and business: the uncertainty principle

Take part in our poll: Will the Federal Election campaign press the pause button on your business investment decisions?

A little over a year ago, I was reading an article published by the Stanford Graduate School of Business. Entitled ‘Why certainty matters in business’, it was an interview with a psychologist who offered the following observation: “Certainty is the catalyst that turns attitudes into action.”

At the time, I thought the phrase neatly captured a universal truth. This, after all, is why banks and big accounting firms go to the trouble, month after month, to measure and analyse the ‘sentiments’ and ‘confidence’ of both business and consumers. Certainty is surely one of the key factors underpinning our convictions, and our confidence to act on them.

It’s also this principle that leads us to assume that elections pose a risk to our economy – especially, of course, when the outcome is anything but a formality. And as the early polling indicates, edition 2016 is looking like a pretty tight race.

Ai Group’s own Economics Weekly newsletter recently confirmed the common assumption about the impact of election campaigns on business and consumer confidence:

“The prospect of an early Federal election with a relatively long campaign period will add… risks to the Australian economy in the short term. This is because elections are traditionally thought to dampen business and consumer confidence and to delay or dampen business investment.”

Pointing to the weekly ANZ-Roy Morgan Consumer Sentiment Survey, we quoted the 20 April, 2016 edition, which confirmed that the data’s history indicated “consumer confidence often falls during an election campaign, although it recovers quickly once a new government is in place”.

Subsequently, however, some new reports have robbed the uncertainty principle of its, um, certainty.

Capital Economics has taken a look at consumer confidence in the four-to-six months ahead of all Australian Federal elections since 1980, and in the three months after the polls. Analysing Westpac’s monthly Consumer Sentiment data, it found the opposite of a “spending splutter”: confidence actually appears to have risen in nine of the 12 elections in that period. The recession-hit 1990 and post 9/11 2001 elections were among those demonstrating a pre-election downturn.

And adding more fuel to the fire, UBS has reported that Australian sharemarket performance has actually been positive in the three months prior to the last seven Federal elections.

Adjusting its data to take global market performance into account, UBS found that the ASX200 outperformed the global MSCI World Index in the preludes to six of the last seven elections. Its conclusion is that a pre-election “holding pattern” by business is a myth.

So what do you think? How is your business confidence shaping up in the lead-up to Election 2016? Complete our poll below to help us conduct a little unscientific research of our own:

This poll has closed.

Watch the next edition of Industry newsletter for our results.

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Graham Turner is the former Editor of Ai Group's Industry magazine, which ceased publication in 2014. He now edits (and moderates) this Blog, together with Ai Group's weekly Email newsletter.

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