Issue 1, 2014. February-March

   

CONSUMER CONFIDENCE INDEX AND ELECTIONS

What is the Consumer Confidence Index? The Consumer Confidence Index (CCI) is an economic indicator used across the world. Consumer confidence is the degree of optimism that consumers feel about the overall state of their economy and their personal financial situation. How confident people feel about stability of their incomes determines their spending activity and therefore serves as one of the key indicators for the overall state of an economy. In essence, if consumer confidence is higher, consumers are making more purchases, boosting economic expansion. On the other hand, if confidence is lower, consumers tend to save more than they spend, prompting contraction of the economy.

Robizon Khubulashvili and Lasha Labadze

Many countries all over the world calculate their Consumer Confidence Index using a standard methodology that measures both consumers' attitudes toward current situations and their expectations for next several months. Thus, overall a CCI consists of two sub-indices, a Present Situation Index and an Expectations Index.

The Consumer Confidence Index in Georgia

ISET Policy Institute (ISET-PI) calculates Georgia's CCI every month based on data collected through interviewing up to 400 randomly selected Georgian citizens. Our history of the Georgian CCI begins in May 2012. Since then, Georgia has gone through two very important elections. The changes in the country were picked up rather precisely by the Consumer Confidence Index, which seems to have dramatically reflected the charged political atmosphere.

How have elections affected the CCI? The first sharp improvement of the CCI was observed in October 2012, which was a sign that the Georgian public was welcoming the first orderly and peaceful democratic transition in Georgia's modern history. Expectations regarding personal financial standing had for the first time crossed into the positive territory. The first steps of Bidzina Ivanishvili's government seemed to have boosted consumer sentiment. In November 2012, CCI continued to climb for the second straight month. The immediate emotional impact of elections produced a fairly large increase in expectations, while the Present Situation Index remained almost the same. In December 2012, Georgian consumer confidence collapsed after two months of excessive optimism. The "excessive" nature of consumers' exuberance could be inferred from the difference between the Present Situation index and the Expectations index in October-November 2012. Both components of the CCI receded to previous levels after what then appeared had been a temporary spike in optimism in the aftermath of the parliamentary elections in October 2012. Moreover, the Expectations index deflated rather sharply, even despite the fact that the Present Situation index seemed to have improved overall since May 2012. All this could be attributed at least in part to the initial excessive optimism of the Georgian consumers.

Similar ups and downs were detected around the presidential elections in October 2013. In November 2013, the CCI reached its historical maximum and nearly reached zero (which is the middle point of the CCI, which is valued within a -100 to +100 range), but in December 2013 it declined again. Thus, elections had similar effects on consumers' sentiment in the last quarters of 2012 and 2013. It is worth noting, however, that the 2013 presidential elections were not marked by the same exuberance in expectations as in the year before. Clearly the difference between the Present Situation index and the Expectations index was much smaller in November 2013. Moreover, the Expectations index did not drop as dramatically. To compare, in December 2012 the Expectations index declined by 11.7 points while in December 2013 it declined only by 4.2 points.

Another factor that contributed to the drop of the CCI in December 2013 was depreciation of the Georgian lari, which affected people's beliefs about prices. As of December 2013, 67% of respondents reported that prices have increased, while the remainder reported stable prices over the previous year.


Elections effect or harvest effect?

Was the CCI affected by the elections, or did the consumer sentiment change for more "mundane" reasons, such as the effect of a good harvest season? The argument can go either way. One can argue that elections happen in early fall, when prices are low and consumer sentiment is at its peak, and therefore more likely to favor an incumbent government. It is logical to argue that, for most rural households, September and October is the period when farmers reap the fruit of a long agricultural season, harvest their grapes and work traditional wine presses. Not surprisingly, their consumer sentiment goes up. Also, for the vast majority of Georgian households, consumer sentiment is strongly correlated with food prices. Higher food prices affect the real income and consumption of the poorer households for which food accounts for a very large share of monthly expenditures. Thus, fall is the best season in terms of food prices. Examining a longer segment of the Consumer Confidence Index may help to finally resolve the argument, and make it possible to separate the harvest effect from the elections effect on the consumer sentiment.