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Consumer confidence surveys are key indicators into the overall health of the economy. When people feel confident about the stability of their incomes it influences their spending and saving activities. Therefore, reports such as Consumer Confidence Index (CCI) and University of Michigan Consumer Sentiment (MCSI) are of particular interest to traders since these reports include inflation expectations and outlooks for consumers. Consumer Confidence Index The CCI survey is conducted monthly and contains about 50 questions that track different aspects of consumer attitudes toward current and future business conditions, current and future employment conditions, and total family income for the next six months. This report is highly regarded by the Fed and can be a key factor in determining U.S. monetary policy. University of Michigan Consumer Sentiment The University of Michigan’s MCSI survey is conducted by phone and tracks consumer opinions of their own finances and the near- and long-term economy. Preliminary data is released on or around the 10th of each month, with final and complete data released on or around the first of the following month. Sector-Specific Reports While these reports provide a snapshot of consumer confidence as a whole, it can also be useful to relate consumer confidence to specific sectors of the economy, such as manufacturing versus non-manufacturing. In some instances, certain parts of the economy will perform better than others, and additional data can help traders to operate with a more sector-specific sense of consumer sentiment. One example of sector-specific report is the Philadelphia Fed Survey, which tracks the manufacturing sector. Other reports of similar nature include US Chicago PMI, Manufacturing, Services and Composite PMIs. Conclusion By gauging consumer confidence surveys against sector-specific performance, traders and the Fed alike can gain a broader understanding of the consumer’s view of the economy, while keeping an eye on the possibility of inflation. As you can see there are a number of factors to think about when trading U.S. confidence surveys but with a little insight and thorough preparation these numbers provide numerous opportunities for traders.

What Is the Consumer Confidence Index? Why Is It Important? Want to know what drives the markets? Ask consumers how they’re feeling. Consumer sentiment surveys, like the Consumer Confidence Index (CCI), gauge optimism and pessimism and can foreshadow changes in the broader economy. During consumers feel confident, and thus, consumption increases. But during , consumers typically feel anxiety and typically don’t spend as much. This can have an effect on sales and lead to cutbacks in production—and if it’s sustained, it can even pave the way for . The CCI is viewed as a because it asks consumers about their spending plans in the near-term future. Data from the Consumer Confidence Index helps to determine the consumption component of the , which accounts for a 60% slice of the total pie, and as such, it is eagerly anticipated by the government. Banks also look to the CCI to forecast lending, and retailers and manufacturers use it to help set inventories. The also watches this measure closely as it determines whether to raise, maintain, or lower prevailing . Consumer sentiment, therefore, is a great measure of demand. When (and How Often) Is the CCI Released ? The Consumer Confidence Index is published at 10:00 AM ET on the last Tuesday of every month on the . What Does the Consumer Confidence Index Measure? How Is It Calculated? The CCI is a set of surveys created in 1967 by the Conference Board, an independent think tank. Results are published on the last Tuesday of every month. These surveys are sent to a sample size of 5,000 households and ask respondents their opinion on five topics: 1. Current business conditions 2. Current employment conditions 3. Business conditions six months from now 4. Employment conditions six months from now 5. Total family income six months from now The total Consumer Confidence Index is the average of the responses from all five categories. The index is also subdivided in the following ways: The Present Situation Index (questions one and two) measures opinions on the current state of the economy. This makes up 40% of the total. The Expectations Index (questions three through five) is forward-looking. This makes up the bulk of the weighting, at 60%. Data is categorized by household demographics, such as age and income, as well as by geographic region. After the entries are submitted, a relative value is calculated for each question, which is then compared with corresponding levels from 1985, the year set as a benchmark, which has a value of 100. The Conference Board chose this year because in the year 1985, it believed the economy was neither overheating nor underperforming. The comparison of relative values is then aggregated into a single number, known as the Index. What Is Considered a “Good” Score on the Consumer Confidence Index? Since the benchmark score is 100, any values over 100 indicate that consumers are more confident than the benchmark set in 1985. An index value below 100 means that consumers are less confident, or more pessimistic, than they were relative to the benchmark. When Was the Consumer Confidence Index Especially Low? In October 2008, the Consumer Confidence Index hit an all-time low of 38. This level reflected the , which stemmed from the implosion of U.S. that sent global financial markets into a tailspin and nearly bankrupted the housing sector. A recession, known as the , would soon follow. What Is the Consumer Confidence Index At Now? In September 2022, the CCI rose to 108, which was significant as it marked the second straight month of increases. The Expectations Index rose to 80.3 from 75.1, and the Present Situation Index grew to 149.6 from 145.4, a gain of more than 10 points from July 2022.

The State Street Investor Confidence Index® (the index) provides an objective, quantitative measure of global risk tolerance of the world’s sophisticated investors. Regional components measure separately the risk appetites of institutional investors in North America, Europe and the Asia-Pacific region. The Index is released at 10 a.m. Eastern Time in the US, on the last Wednesday of each month. The Premise Confidence in the economy and the capital markets is a critical driver of economic and financial fluctuations and of the business cycle. When confidence increases, consumers and investors want to buy consumer goods, durables and invest at prevailing prices. When confidence decreases, spending and risk-taking tend to fall. Investors are said to be confident when the news about the future is good and stock prices are rising. However, rising prices are related both to good fundamentals, such as growth in industrial production and productivity, as well as to the underlying sentiment or mood of investors. A good confidence measure should indicate whether, for a given set of fundamentals, investors have an increased or decreased appetite for risk. Quantitatively measuring shifts in investor sentiment presents a unique set of problems to researchers. Investor surveys are often outdated by the time they are released. On the institutional side, accuracy can be compromised as decision makers are often too busy to fill out surveys. In all cases, survey responses, like prices, tend to obscure the effects of fundamentals and investor sentiment. The Approach State Street’s approach measures confidence directly and quantitatively by assessing the changes in investor holdings of risky assets. The idea is simple: the more of their portfolios that sophisticated investors are willing to devote to riskier as opposed to safer investments, the greater their risk appetite or confidence. When risk appetite increases, investors move to increase, in the same proportion, their holdings of each risky investment. This process may occur when there is good news and prices are up, but could also happen over a period of bad news and falling prices. As a result, the risk appetite of institutional investors is a separate and distinct measure from the behavior of prices. Actual investor holdings and recent purchases provide a solid foundation on which to base a measure of investor confidence.

The confidence of Australian and New Zealand retail investors has dropped sharply as global and local economies continue to face disruptions. Chartered Accountants Australia and New Zealand’s (CA ANZ’s) fourth annual Investor Confidence survey reveals that confidence levels are lower than they were even at the height of the pandemic. Issues such as global political unrest, the ongoing impacts of COVID-19, and climate change have again shaken investor confidence, which had started to recover in 2021. For the fourth year in a row, independent auditors remained the most trusted group when it came to stakeholders that advance investor protection, followed by regulators, analysts, audit committees and stock exchanges, which highlights the vital role auditors play in the economy. The survey by CA ANZ, with help from the Center for Audit Quality in the United States, delves into how retail investors feel about capital markets, public companies, financial reporting, the impact of issues such as climate change and crypto-assets, and who they trust to protect their interests. Investor confidence is vital to the health of economies and capital markets. By understanding what investors are worried about and what information they need, the profession can continue to provide them with the ‘clear view out the front windscreen’ they’re looking for in challenging times. While confidence in both the global and local economies has fallen, confidence in investing in public companies and in their annual reports remains strong. However, investors find current financial reporting too complicated, and believe mandatory digital reporting would help them find the tailored information they’re looking for. They are also still looking for more consistent reporting on climate change and sustainability, with support for mandatory reporting standards and assurance on these issues remaining strong. The survey also found that investors lack confidence in investing in crypto-assets, citing a lack of transparency, regulation and understanding of the technology as the primary reasons. Younger investors (between 18-44 years) were much more confident investing in crypto-assets than older investors. The integrity and robustness of financial reporting and audit are vital to help investors navigate through challenging times. CA ANZ will continue to advocate for the evolution of both standards and the profession to meet the changing information needs of the market and protect the public interest.

Stock-market crashes are informative about the prospects for macroeconomic depressions. Long-term data for 30 countries reveal that, conditional on a crash, the probability of a minor depression is 31 percent and of a major depression is 10 percent. The largest depressions are particularly likely to be accompanied by crashes. We allow for flexible timing between crashes and depressions to compute the covariance between stock-returns and an asset-pricing factor, which depends on the decline of consumption during a depression. With a coefficient of relative risk aversion around 3.5, this covariance accounts for the observed average (levered) equity premium of 7 percent.

The Samuelson quote is remarkable because it is simultaneously extremely clever and extremely misleading. We find, for 30 countries with long-term data, that stock-market crashes (cumulated multi-year real returns of –25 percent or less) go along with minor depressions (multi-year declines of consumption or GDP by 10 percent or more) 31 percent of the time and major depressions (declines by 25 percent or more) 10 percent of the time. In reverse, minor depressions feature stock-market crashes 71 percent of the time, whereas major depressions feature these crashes 92 percent of the time. Thus, as the Samuelson quote suggests, stock-market crashes are far more frequent than depressions. Nevertheless, a stock-market crash provides good reason for concern about the macroeconomy—because the conditional 31 percent chance of a minor depression and 10 percent chance of a major depression are far above the typical probabilities. In reverse, the absence of a stock-market crash is reassuring in the sense that a depression is highly unlikely.

The next stock market crash could easily kick-start a recession, and the underlying reason is that stocks are shares of ownership in a corporation. As a result, the stock market reflects investors' confidence in the future earnings of all the companies listed. Corporate earnings are dependent on the health of the U.S. economy, and that sometimes makes the stock market a leading indicator for the U.S. economy as a whole.

Stock market crashes can reduce business financing and consumer confidence, both of which can cause recessions.

The stock market is an excellent economic indicator for the U.S. economy. It reflects how well all listed companies are doing. If investors are confident, they will buy stocks, stock mutual funds, or stock options. Some experts believe markets predict what the savviest investors think the economy will be doing in about six months. What Makes the U.S. Stock Market Attractive U.S. financial markets are very sophisticated and make it easier to take a company public than in other countries. Information on companies is also easy to obtain. That raises the trust of investors from around the world. As a result, the U.S. stock market attracts the most investors. It’s an attractive place for U.S. companies to go when they are ready to grow. 3 Ways That Stock Markets Affect the Economy Stock markets affect the economy in three critical ways: They allow small investors to invest in the economy. They help savers beat inflation. They help businesses fund growth. Allowing Small Investors to Invest in the Economy Stocks allow the individual investor to own part of a successful company. Without stock markets, only large private equity investors and financial institutions could profit from America's free market economy. Helping Savers Beat Inflation Investing in the stock market helps savers beat inflation over time. The rule of thumb is that stock prices increase 7% a year on average after taking inflation into account.1 That's enough to compensate most investors for the additional risk of owning stocks rather than bonds (or keeping the money in a savings account). Note Stocks provide the capital for companies to grow large enough to gain a competitive advantage through economies of scale. Helping Businesses Fund Growth. Growing, successful businesses need capital to fund growth and the stock market is a key source. In order to raise money this way, owners must sell part of the company, and to do so they "take the company public" through an initial public offering (IPO) of the company's shares. An IPO raises a lot of cash. It also signals that the firm is successful enough to afford the IPO process. The drawback is that the founders no longer own the company; the stockholders do. However, founders can retain a controlling interest in the company if they own 51% of the shares. Note Stocks indicate how valuable investors think a company is. When stock prices rise, it means investors believe earnings will improve. Falling stock prices mean investors have lost confidence in the company's ability to profit. How a Stock Market Crash Affects the Economy Stock prices rise in the expansion phase of the business cycle.2 Since the stock market is a vote of confidence, a crash can devastate economic growth. Lower stock prices mean less wealth for businesses, pension funds, and individual investors. Companies can't get as much funding for operations and expansion. Note When retirement fund values fall, it reduces consumer spending. A stock market crash will adversely affect the nation’s gross domestic product as personal consumption and business investment are some of the major components of GDP. If stock prices stay depressed long enough, new businesses can't get funds to grow. Companies that had invested their cash in stocks won't have enough to pay employees, or fund pension plans. Older workers may find that they don't have enough money to retire.

Because of its size and interconnectedness, developments in the US economy are bound to have important effects around the world. The US has the world’s single largest economy, accounting for almost a quarter of global GDP (at market exchange rates), one-fifth of global FDI, and more than a third of stock market capitalisation. It is the most important export destination for one-fifth of countries around the world. The US dollar is the most widely used currency in global trade and financial transactions, and changes in US monetary policy and investor sentiment play a major role in driving global financing conditions (World Bank 2016). At the same time, the global economy is important for the US as well. Affiliates of US multinationals operating abroad, and affiliates of foreign companies located in the US account for a large share of US output, employment, cross-border trade and financial flows, and stock market capitalisation. Recent studies have examined the importance of global growth for the US economy (Shambaugh 2016), the global impact of changes in US monetary policy (Rey 2013), or the global effect of changing US trade policies (Furman et al. 2017, Crowley et al. 2017). It is likely that there will be shifts in US growth, monetary and fiscal policies, as well as uncertainty in US financial markets. What will be the global spillovers? Our recent work (Kose et al. 2017) attempts to answer these questions: How synchronised are US and global business cycles?How large are global spillovers from US growth and policy shocks?How important is the global economy for the US?How synchronised are US and global business cycles? Business cycles in the US, other advanced economies (AEs), and emerging market and developing economies (EMDEs) have been highly synchronous (Figure 1.A). This partly reflects the strength of global trade and financial linkages of the US economy with the rest of the world, but also that global shocks drive common cyclical fluctuations. This was particularly the case at the time of the 2008-09 Global Crisis. It is not a new phenomenon, however. Although the four recessions the global economy experienced since 1960 (1975, 1982, 1991, and 2009) were driven by many problems in many places, they all overlapped with severe recessions in the US (Kose and Terrones 2015). Other countries tend to be in the same business cycle phase as the US roughly 80% of the time (Figure 1.B). The degree of synchronisation with US financial cycles is slightly lower, but still significant – credit, housing, and equity price cycles are in the same phase about 60% of the time. Although it is difficult to establish empirically whether the US economy leads business and financial cycle turning points in other economies, recent research indicates that the US appears to influence the timing and duration of recessions in many major economies (Francis et al. 2015). Figure 1 Synchronisation of business cycles A. Correlations with US business cycles Image: Haver Analytics; World Bank; Kose and Terrones (2015); IMF. B. Concordance with US business and financial cycles Image: Haver Analytics; World Bank; Kose and Terrones (2015); IMF. How large are global spillovers from US growth and policy shocks? A surge in US growth – whether due to expansionary fiscal policies or other reasons – could provide a significant boost to the global economy. Shocks to the US economy transmit to the rest of the world through three main channels. An acceleration in US activity can lift growth in trading partners directly through an increase in import demand, and indirectly by strengthening productivity spillovers embedded in trade. Financial market developments in the US may have even wider global implications. US bond and equity markets are the largest and most liquid in the world and the US dollar is the currency mostly widely used in trade and financial transactions. This makes US monetary policy and investor confidence important drivers of global financial conditions (Arteta et al. 2015, IMF2015). Given its role in global commodity markets (the US is both the world’s largest gas and oil consumer and producer), changes in US growth prospects can affect global commodity prices. This affects activity, fiscal and balance of payment developments in commodity exporters. Estimates indicate that a percentage-point increase in US growth could boost growth in advanced economies by 0.8 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point after one year (Figure 2.A). Investment could respond even more strongly. A boost to investment could come for instance from fiscal stimulus measures – but the effect would largely depend on the circumstances of the implementation of these measures, including the amount of remaining economic slack, the response of monetary policy, and the adjustment of household and business expectations to the prospect of higher deficit and debt levels. A faster tightening of US monetary policy than previously expected could, for instance, lead to sudden increases in borrowing costs, currency pressures, financial market volatility, and capital outflows for more vulnerable emerging market and developing economies. Even in the absence of actual policy changes, heightened uncertainty driven by financial market volatility or ambiguity about the direction and scope of US policies could discourage investment both in the US and in the rest of the world. Empirical estimates suggest that a sustained 10% increase in US stock market volatility (specifically, the VIX) could, after one year, reduce investment growth in the US by about 0.6 of a percentage point, in other advanced economies by around 0.5 of a percentage point, and in emerging market and developing economies by 0.6 of a percentage point (Figure 2.B). Figure 2 US growth and uncertainty spillovers A. Growth spillovers Image: Haver, Bloomberg, World Bank estimates. B. Uncertainty spillovers on investment growth Image: Haver, Bloomberg, World Bank estimates. How important is the global economy for the US? Important as the US is to the global economy, the US economy is also affected by its trade and financial linkages with the rest of the world. Global economic developments play an important role in driving activity and financial markets in the US. US multinationals account for a large share of US output and labour productivity growth, and their presence in financial markets is large. In turn, foreign multinationals operating in the US provide a large share of US employment and exports (Figure 3.A). Much of the global value chain activity is conducted through US multinational corporations and their affiliates abroad. Overall, one-quarter of US exports represents US value added embedded in other countries' exports. This ‘forward participation’ is particularly high in chemicals, business services, and electronics, and with China, Canada, and Mexico. ‘Backward participation’ is more limited: the average import content of US exports was 13% in 2014, well below the average for other advanced economies (27%). This interconnectedness is an important source of spillovers between the US and the global economy. As a result, growth setbacks originating in other economies, or policy changes affecting market access of US companies, can have detrimental effects on the US. These effects are particularly noticeable in the more globally integrated manufacturing sector (Figure 3.B). Figure 3 Importance of the global economy for the US economy A. Role of foreign multinational corporations in the US Image: Bureau of Economic Analysis, World Bank estimates. B. Spillover to US from 1 percentage point increase in global, advanced economy, and emerging market and developing economy growth Image: Bureau of Economic Analysis, World Bank estimates. Acceleration or uncertainty? Given its size and the strength of its ties with the global economy, shocks to the US economy are transmitted globally through many channels. On the one hand, an acceleration in US growth could be expected to have positive effects for the rest of the world, if not counterbalanced by increased trade barriers or an unexpected tightening of global financing conditions. On the other hand, persistent policy uncertainty could hamper growth throughout the global economy, and could have particularly adverse effects on investment growth in emerging market and developing economies, which have already showed weakness in recent years (World Bank 2017).

One reason the US economy has such a large effect on global markets is simply due to its size. The United States is the largest economy in the world and its GDP accounts for approximately one-fifth of the global economy. This means that any changes in the US economy can have a significant ripple effect across the rest of the world. Another important factor is the role of the US dollar as the global reserve currency. This means that many countries hold US dollars as a form of reserve asset, which they can use to settle international transactions or support their own currencies. As a result, fluctuations in the value of the US dollar can have a major impact on the global economy. Furthermore, the US is home to some of the world’s largest and most influential companies, such as Apple, Microsoft and Amazon. These companies have a massive impact on global markets, as they are major players in industries ranging from technology to retail to finance. Changes in their stock prices or business decisions can send shockwaves through global markets. Thus, equity prices or the prices of stocks, are very closely tied to the US Economy. When the economy in America is doing well companies, such as the ones discussed above, will experience an increase in profits and as a result stock prices can be increased. This in turn has an effect on global stock markets, as many global companies have notable exposure to the American market. If US companies are doing well, it can indicate that the global economy is also growing, which then leads to increased investor confidence and higher stock prices globally. So, what does all of this mean for the rest of the world? For starters, it means that changes in US economic policy or performance can have a significant impact on other countries’ economies. For example, if the US Federal Reserve raises interest rates, it can lead to a stronger US dollar, which can make it more expensive for other countries to borrow money. This can have a negative impact on countries that rely heavily on borrowing to fund their own economic growth. Inflation in the USA is a critical factor that impacts the global economy. When inflation occurs, the value of the US dollar declines, which can cause a ripple effect throughout the world’s financial markets. As the value of the US dollar decreases, it affects other countries’ currencies, particularly those that use the US dollar as a reserve currency. Additionally, inflation in the USA can lead to changes in interest rates, which can impact borrowing costs for individuals and businesses around the world. For example, if the US Federal Reserve raises interest rates to combat inflation, it can lead to an increase in borrowing costs for other countries, which can negatively impact their economic growth. It’s essential to monitor inflation in the USA as it can have significant implications on the global economy, financial markets, and individual finances.

In this US hard landing scenario, businesses will reduce investment and hiring while increasing layoffs, as tighter lending standards, rising borrowing costs and weakening demand put pressure on profit margins. At the same time, consumers will significantly cut back on spending amid persistent inflation, deteriorating income prospects and rapidly eroding pandemic-era excess savings. With consumer spending being the main driver of the US economy, this scenario will lead to a recession. With the US as the largest economy globally, a hard landing scenario will have widespread spillover effects. Consequently, other major economies will also register a decline in real GDP growth in 2023 compared to the baseline, as will the global economy overall. In 2024, there will be a diverging trend with China already posting an increase compared to the baseline real GDP growth, while the US, the Eurozone and the global economy as a whole remain below baseline growth. In terms of real GDP growth rates, the US hard landing scenario will tip both the US and the Eurozone into recession in 2023, with the US even remaining in a recession in 2024.

Despite the popularity of business confidence as a leading indicator of future output, the direct link between the former and business investment has not yet been investigated. Our paper fills this gap in the literature. Using quarterly US data for over sixty years, we investigate whether confidence predicts business investment, and whether confidence can forecast investment downturns and the direction of investment growth. We find that business confidence leads US business investment growth by one quarter, and structures by two quarters; and business confidence has predictive ability for investment growth even after controlling for conventional factors such as output, user costs, cash flows, and stock prices. Business confidence has a superior predictive power, relative to traditional factors, for investment downturns over 1–3-quarter forecast horizons and direction of investment growth over 2-quarter forecast horizons in the US economy. Impulse response analysis reveals that exogenous shifts in business confidence reflect short-lived non-fundamental factors, consistent with the ‘animal spirits’ view of investment. Our findings have implications for improving investment forecasts, developing new business cycle models, and studying the role of behavioural factors determining investment growth.

Confidence: we’re not talking here about standing up to make a speech, rather about business confidence and consumer confidence. Over the last 12 months we’ve heard the terms a lot, as confidence plunged when the first lockdown was announced and then rose again as the vaccine roll-out began. But what is confidence? And why does it matter? If we look at business confidence first, a good example, and one that is often quoted on the financial pages, is the Purchasing Managers’ Index (PMI). So what is it? And how does it work? The PMI is a measure of business confidence, showing whether business expects the economy and prevailing business conditions to be favourable or unfavourable. The PMI is based on a monthly survey sent to senior executives across a broad spread of industries and asks questions about new orders, inventory levels, production, deliveries and employment. The ‘headline’ number, the one you will often see quoted, can be anywhere between 0 and 100. In ‘normal times’ it hovers around 50, with any figure above indicating that business is confident about the future, whilst a figure below 50 suggests the opposite. To give you an example of the PMI in action, last April the PMI in the Eurozone crashed to 13.5 as the economic impact of the pandemic became apparent. The UK fared even worse, with the PMI falling to a record low of 12.3 in the services sector. Twelve months later, with the vaccine rollout gathering pace, the PMI for the UK had risen to 61.0. As noted in the above example, you may also see PMI figures quoted for different sectors of the economy, such as manufacturing and services. Consumer confidence has a similar numerical value, although that is expressed in plus or minus terms. In April the Consumer Confidence Index rose to minus 15, up from minus 16 in March. Although negative, that was the highest figure since March of last year, with the Index having been as low as minus 34 in May 2020. Why is confidence important? When consumers feel confident they are more likely to spend and more likely to borrow, both of which are likely to boost the economy. A very simple example is home improvements: we are unlikely to spend the money on a new bathroom, which would benefitting the bathroom supplier and the plumber, unless we feel confident about our future prospects and employment. The search for confidence, or at least, stability, is almost certainly the reason so many people have left the hospitality sector during the last year (with many outlets now struggling to find staff to re-open). Similarly, when businesses feel confident they will invest in both equipment and new members of staff. Clearly any potential “third wave” of the virus would dent confidence again: that is one of the reasons why the Government is so keen to avoid any further lockdowns. It needs to rebuild not just the economy, but our confidence in the economy. Perhaps then we will start to spend the billions of pounds that we, as consumers, have saved over the past year.

Investors, Small Businesses Need Your Backing to Drive the Economy Forward

In the middle of a global pandemic, , and investing in small businesses has become crucial for the economy to recover. While the Small Business Administration is now offering a  to entrepreneurs, many are still having a hard time finding the funds they need.

What really drives the U.S. economy? No, it is not war. In fact, it is small business -- firms with fewer than 500 employees -- that drives the U.S. economy by providing jobs for over half of the nation's private workforce.

In 2010, there were 27.9 million small businesses in the United States, compared to 18,500 larger firms with 500 employees or more, according to the .

Small businesses have a much bigger impact than you might initially think. Nearly half of U.S. employees work for small businesses and even the turbulence of recent years hasn’t slowed down the small business economy—last year alone, over 5 million new businesses were created. It’s undeniable that the US economy has a lot to thank small businesses for. 

While economic uncertainty, mass redundancies, and the changes in priorities people experienced post-pandemic led to many people setting up on their own in recent years, digital transformation has also supported the rise in small businesses. Digital marketing, online shopping, remote working, and continued digital transformation have helped self-employed people and small businesses to operate successfully. 

Introduction Background The role of policy uncertainty began to emerge in various economic analyses of the South African situation in the late 2000s, as the country's economic performance began to deteriorate. Yet it was not until 2015 that the authors of this paper sought to find a way to measure it, albeit by proxy, constructed from certain researched components. The impact of policy uncertainty had by then come to have important implications for business confidence and the investment climate in the country. At the time, hardly any economic assessment or media release about South Africa from international or local financial institutions, business lobbies, economic analysts, financial journalists or credit rating agencies appeared without the words 'policy uncertainty' in them. It seemed that it was 'an idea whose time had come' and that the regular measurement of policy uncertainty needed to be pioneered in this country. There were already ample global precedents for taking such a step. It was possible to access substantial previous international research on the subject. Therefore, not only was the calibration of policy uncertainty clearly relevant to South Africa, but it was also spurred by the increasing academic and policy interest globally in the definition, cause, effect and measurement of policy uncertainty. Innovative work in this field had already been done by academics at Stanford University for the US and other economies in the world. Indeed, there is now a 'World Uncertainty Index', launched in 2020 by Stanford University academics and the International Monetary Fund (IMF) to assess what were perceived to be rising levels of policy uncertainty in the global economy. While efforts have been made, at an academic level, to calibrate degrees of policy uncertainty, recent economic developments such as the Great Recession (and the failure of most economists to foresee it) have also prompted people to revisit and extend the debate on basic theories of risk and uncertainty. The poor track record of most economic forecasting attempts has been highlighted by several economists. The financial crisis of 2007-2008 drove home the intellectual failure of optimising models to apprehend the disruptive action resulting from encounters with an unknowable future. This has been the subject of several academic publications. Notably, Kay and King (2020) argue in a recent persuasive study that the world has paid a high economic price because so many scholars, investors and advisers have abandoned the precautionary insights that earlier economists like Frank Knight and J.M. Keynes provided, while also making a clear distinction between risk and uncertainty. Keynes, in particular, was insistent about the existence of inescapable, general uncertainty about the future and its implications for economic policy. Uncertainty, for Keynes, became a major issue in economics and business when livelihoods or prosperity depended on people taking a firm view of the future. Following on from this, King and Kay are adamant in their conclusion that the real world must now embrace both the notion and the reality of 'radical uncertainty', which presents both 'shocks' and 'opportunities'. Their research strikes a necessary and modern cautionary note about the role of uncertainty in decision-making. This overall broad and cumulative shift in focus at several levels in relation to policy uncertainty suggested that indeed the time had arrived to mobilise research efforts elsewhere and to craft a Policy Uncertainty Index (PUI) adapted to South African circumstances. With this in mind, a joint working group was set up in 2015, comprising academics from the North-West University (NWU) Business School and the NWU School of Economics, to interrogate existing international research and to develop a suitable domestic index. After several months of research, the first PUI was eventually launched early in 2016, covering the 4Q of 2015. In the construction of a PUI for South Africa, the following were determining factors at the time: 1. The single universal driver of all similar indices to date had been media coverage that included the words 'policy uncertainty'. There was no reason not to also accept this as one of the main components of South Africa's measurement of the phenomenon. However, the US model included two other factors: firstly, uncertainty arising from changes in the US tax code, and secondly, measurement of the dispersion among individual forecasters of certain economic variables in the US economy. Regarding the tax code, the NWU working group thought that in South Africa's case it was not a relevant proxy for policy uncertainty. Instead, the issue of political outlook and uncertainty contained in the quarterly Survey of Manufacturing Industry, published by the Bureau for Economic Research (BER) at the University of Stellenbosch, was taken as a credible substitute component in South Africa. 2. As it was not possible to replicate the level of research capacity available in the US, the NWU working group decided that the views of a cohort of economists on levels of uncertainty in South Africa would be solicited via a brief questionnaire. In addition, whereas almost all other national policy uncertainty indices are published monthly, both capacity limitations and the inclusion of an economic narrative embedded in the PUI would make a quarterly index more appropriate in South Africa. In passing, it should be mentioned that, rather fortuitously, the first PUI for the 4Q 2015 showed a huge initial spike. This was due to the entirely unexpected and controversial dismissal in December 2015 of respected Finance Minister Nene by then President Jacob Zuma, which came as a big shock to the markets and the business community. In analysing the subject of policy uncertainty, the authors of this paper acknowledge, of course, that it cannot explain all the lapses or gaps in a country's economic performance. It is also important to explore and determine the extent to which policy uncertainty has an independent impact on investment decisions and to assess its role when the other recognised factors, driving private fixed investment, are weighed. Yet a number of authors revealed some interesting correlations - highlighting that economic outcomes and policy uncertainty do seem to have an impact on the willingness of business to invest, hire or act. There is increasing empirical evidence that when policy uncertainty is high, it may suppress investment, employment and output. Indeed, elevated levels of policy uncertainty may inhibit meaningful investment and consumption. Economic policy uncertainty, therefore, has potentially adverse consequences for an economy. Given SA's significant socioeconomic challenges, the role of policy uncertainty as a recurring theme in the country's economic performance over the past few years needed to be assessed. More recently, the SA economy has also had to cope with the uncertainties generated by COVID-19 and civil unrest, which reinforced interest in the subject both academically and practically. Also requiring examination was what the phenomenon of policy uncertainty and its approximate measurement could mean conceptually and practically for decision-makers in both the public and private sectors in South Africa. Problem statement A valid criticism of most economic theories is that it is usually set against a background of ease and safety. Events steadily dispelled this rather artificial sense of security, especially in emerging markets. It has become increasingly necessary to acknowledge that steering the economy is all about navigating poorly charted waters and avoiding rocks of uncertain location. What business and other decision-makers need is a reliable and identifiable peg on which to hang a number of key questions about the dynamics of policymaking, its impact on the economy and, where necessary, how the situation can be improved. That is why it was thought helpful to accompany the release of each PUI with a narrative, discussing the reported performance from an economic perspective. A deeper understanding of how uncertainty induces 'shocks' and how persistent policy uncertainty affects economic performance could help to identify the remedies required to minimise such uncertainty, within an appropriate economic context. In 2021, policy uncertainty remains highly relevant to the economic and business outlook - even more so with the country still grappling with COVID-19 and more recently having to deal with the fallout from civil unrest. As events unfolded, it was clearly the institutional setting and policymaking environment that influenced the extent to which negative 'shocks' and elevated uncertainty could either (a) be easily managed or (b) inhibited economic activity. There was an important interaction here which must still be explored in the light of experiences to date in South Africa. To this end, this paper now addresses two problems: How well has the PUI been measuring policy uncertainty in SA since its introduction in 2015? What are some of the implications for policymakers and the business community? Objectives Against the foregoing background on the PUI in South Africa, this paper, therefore, seeks to: provide a review of the literature on economic and policy uncertainty to show how the PUI fits into this broader narrative; and compare PUI trends against the backdrop of an analysis of the South African economy over the period 2015-2021 and compare the PUI's performance to measures of investment. The uncertainty discourse Policy uncertainty: Causes and consequences Before conducting any analysis of uncertainty, it is useful to consider the concept of uncertainty and its measurement. McLean (2015:3) argues that policy uncertainty occurs when 'economic agents experience doubt over the economic consequences of government policies'. This kind of uncertainty is subjective. The uncertainty occurs because of agents' perception of some policy event that has unpredictable consequences. The unpredictability is key here and emphasises the distinction made between uncertainty and risk. In his work Risk, uncertainty and profit, Knight (1921) explains that risk can be calculated. For a risk, the distribution of outcomes is known from past experiences, and statistical analysis can be used to assign a probability to an outcome. In the case of uncertainty, the situation is to a large extent unique and the outcomes are unpredictable. McLean (2015:3) explains that the more complicated an event is, or the more it is perceived to be subject to unforeseeable and unpredictable outcomes, the greater is the uncertainty. This conceptual framework also resonates with G.L.S. Shackle's (1955) pioneering work on uncertainty in economics in the mid-20th century. According to his framework, when an individual is absolutely uncertain about the consequences of any of the courses of action available, uncertainty would be 'unbounded'. However, when an individual is faced with the task of selecting from a number of mutually exclusive courses of action, and it is possible to visualise the outcome, it points to 'bounded uncertainty'. Shackle rightly thought at the time that the majority of decisions made by business would be in terms of 'bounded uncertainty' and confined most of his further analysis to that. What the recent literature and empirical evidence are now suggesting is that the phenomenon of 'unbounded uncertainty' has over the past few decades become a more dominant feature globally and domestically. In other words, the boundary between 'unbounded' and 'bounded' uncertainty shifted, with important consequences for business. There appear to be at least four main causes of this increased uncertainty: (1) the decision-maker can still only afford to devote a limited amount of resources to the process of gathering and compiling information; (2) individuals and institutions are still limited in their ability to predict the future; (3) there are imperfections in the communication systems that human beings employ to transmit information to one another, even with the help of modern technology; and (4) there is an increased prevalence of discretionary, arbitrary or inconsistent actions by governments. The development of 'policy uncertainty indices' is, therefore, an effort to address these phenomena and throw new light on the impact of 'unbounded' uncertainty on an economy in the 21st century. There are two main channels through which such uncertainty may influence the economy. The first channel draws on real options theory, based on Bernanke (1983) and leads to what Bloom (2014) calls the 'wait-and-see' effect. When the actions of firms, such as investment or hiring, are characterised by a high degree of irreversibility, uncertainty will cause them to delay their actions. Over time, firms receive new information that reduces uncertainty and informs optimal actions. So, when the benefit of new information is greater than that of committing to a sub-optimal investment or hire, the value of waiting increases and this dampens economic activity. The second channel has to do with risk aversion and risk premia. When investors are risk averse, a high level of uncertainty will increase risk premia; this causes borrowing costs to increase and suppresses growth. An official commitment to policy reform can nevertheless also generate its own uncertainties: Even policy reforms … can involve a serious dilemma, especially when they include structural and microeconomic features. On the one hand, entrepreneurs, workers and farmers must respond to signals generated by the reform to be successful. On the other hand, rational behaviour by the private sector calls for the withholding of investment until much of the residual uncertainty regarding the eventual success of the reform is eliminated … even a moderate amount of policy uncertainty can act as a hefty tax on investment and that otherwise sensible reforms may prove damaging if they induce doubts as to their permanence. (Rodrick 1991:229) Measuring policy uncertainty internationally The literature that sets out to measure policy uncertainty has its recent roots in the work of Baker, Bloom and Davis (2015). There are different versions of the first paper, but the brief discussion that follows here draws on their 2015 National Bureau of Economic Research (NBER) working paper titled Measuring economic policy uncertainty. The index is a news-based measure reflecting the frequency of articles in 10 leading US newspapers that contain the following triple-word group: 'economic' or 'economy'; 'uncertain' or 'uncertainty'; and one or more of 'congress', 'deficit', 'Federal Reserve', 'legislation', 'regulation' or 'White House'. The paper reports that the index was then extended to cover a longer time period and more countries and to reflect policy categories, such as health care policy uncertainty and national security policy uncertainty. To address concerns about accuracy, reliability and consistency, Baker et al. (2015) evaluated the index in various ways. They found a strong relationship between the index and other measures of policy uncertainty, such as implied stock market volatility. They similarly found a relationship between the index and mentions of policy uncertainty in the Federal Reserve System's Beige Books. They also asserted that the left-leaning or right-leaning slant of a newspaper does not distort the overall index. Finally, they did an audit of 12 000 randomly selected articles to evaluate the performance of the computer-automated methods used and found a high correlation between the indices compiled by human evaluators and the computer-generated indices (Baker et al. 2015). Since the early work of Baker et al. (2015), their Economic PUI has expanded to include 26 countries. The authors also produce a number of other indices, including a World Uncertainty Index, a firm-level political risk index and a Twitter-based uncertainty index - all published via the web site: (see also Ahir, Bloom & Furcer 2018). Other recent research has also been done specifically on the effect of world economic policy uncertainty on the foreign direct investment of 138 countries over the period 1996-2018. Overall it suggests that world economic policy uncertainty reduces foreign direct investment and that the magnitude of the effect is greater in emerging and developing economies than in advanced ones (Avom, Njangang & Nawo 2020). The South African literature There have been a number of academic contributions to the policy uncertainty literature in the South African context. Redl (2015) set out to measure macroeconomic uncertainty in South Africa over the period 1990-2014 and constructed an index from three sources: (1) the measure of disagreement among professional forecasters about macroeconomic variables, which uses data from the Economist of the Year competition (run by Media 24); (2) a media-based measure which counts articles mentioning economic uncertainty in South Africa in national and international newspapers; and (3) mentions of uncertainty in the Reserve Bank's quarterly economic review. He found that the index is positively correlated with other measures of uncertainty, specifically the realised and option-implied volatility of the stock market. The index reflected high levels of uncertainty at the time of the democratic transition and the depreciation of the rand in 2001, and during the global financial crisis in 2008. A structural vector autoregression (VAR) model was used to measure the impact of uncertainty shocks in the economy. The results showed that uncertainty is a leading indicator of recession and that uncertainty shocks are inflationary. Hlatshwayo and Saxegaard (2016) examined the role of policy uncertainty in reducing the responsiveness of exports to relative changes in the real effective exchange rate. They constructed a 'news chatter' measure of policy uncertainty, using a number of search algorithms to search the Dow Jones Factiva news aggregator to compile the index of economic policy uncertainty. Hlatshwayo and Saxegaard (2016) then used a regression model with the Pooled Mean Group estimator to analyse the determinants of export volumes, including economic policy uncertainty. The results showed that increased policy uncertainty diminishes the responsiveness of exports to the real effective exchange rate and reduces export performance over the short and the long run. Adopting a more specific focus, Kotzé (2017) examined fiscal policy uncertainty and economic activity in South Africa. His work had two empirical parts. The first identified fiscal volatility shocks. Kotzé (2017) considered consumption taxes, labour income taxes, capital gains taxes, and government expenditure, as well as specified policy rules for the individual fiscal instruments. He then used a stochastic volatility specification to model independent shocks to the fiscal rules and examined the volatility processes. The second part then combined the measures of an unexpected increase in the volatility of a specific instrument with other macroeconomic variables in a VAR model. This was aimed at estimating the effects of an aggregate fiscal volatility shock on output, consumption, investment, prices, interest rates, labour productivity, wages and labour cost. The results showed that shocks may lead to persistent reductions in output, consumption and investment, and cause price increases. In related work, Aye (2019) undertook an asymmetric analysis of fiscal policy uncertainty. The GARCH (1.1) conditional variances in consumption tax, labour income tax, capital tax and government spending were used to measure fiscal policy uncertainty. Linear projection models that allow for asymmetry showed that a high level of fiscal policy uncertainty had a negative impact on real GDP. In general, high volatility (bad news) had a larger effect than low volatility (good news). More recently, Kirsten (2020) examined the link between economic policy uncertainty and macroeconomic variables in South Africa. He constructed an economic PUI following Hlatshwayo and Saxegaard (2016) and used it in constant parameter and time-varying parameter VAR models, together with industrial production, inflation, the 10-year government bond yield and the real effective exchange rate. The results showed that an unanticipated increase in the uncertainty index caused a decline in industrial production and a depreciation in the exchange rate. It also caused an increase in inflation and the 10-year government bond yield. The impact of such shocks declines systematically over time. Binge and Boshoff (2020) constructed a measure of economic uncertainty for South Africa. Their focus was on using microdata from business surveys conducted by the BER. It is argued that survey-based indicators based on the opinions of key agents are a more direct measure of uncertainty. The survey-based indicators were then combined with text mining data and financial data to calculate a composite measure of economic uncertainty. Binge and Boshoff (2020:116) explain that three composite survey-based indicators were calculated: (1) the scaled, weighted, cross-sectional standard deviation of forward-looking responses, (2) the weighted, cross-sectional mean of individual firm forecast errors; and (3) the weighted, cross-sectional standard deviation of firm forecast errors. They then combined the survey-based indicators with alternative indicators to incorporate information from different sources of uncertainty. More specifically, they used the first principal component of five standardised uncertainty proxies as an overall measure. The results showed that an increase in uncertainty is significantly related to a decrease in real economic growth over the period 1992-2017. The Policy Uncertainty Index and analysis The PUI compiled by the NWU Business School is published quarterly. The index number is a composite of a news-based uncertainty measure, a survey of economists and their views on policy uncertainty, as well as inputs from manufacturers surveyed by the BER for their views on political constraints facing business. The PUI is the net outcome of positive and negative factors influencing the perceptions of policy uncertainty over the relevant period. An increase beyond 50 reflects heightened policy uncertainty; a decline in the PUI means reduced uncertainty. The news-based measure draws on a Google search for news articles that mention 'policy uncertainty' in 'South Africa'. The operator AROUND (10) is used to ensure that these terms are captured in conjunction with one another. These mentions are then normalised using mentions of 'economy' AROUND (10) 'South Africa'. The economists are asked five questions. The first is whether they think that the level of policy uncertainty increased, stayed the same or decreased compared to the previous quarter. The second, third and fourth questions relate to foreign investors, local investors and consumers respectively, and whether the economists think that the uncertainty they face has increased, stayed the same or decreased. The fifth question is whether they think that politics have become more uncertain, less uncertain or stayed the same, compared to the previous quarter. The BER survey asks business a number of questions as part of a bigger confidence survey, but the PUI uses only the one response to the question about whether business managers think that there are political constraints facing their business. The three components of the index are equally weighted in the calculation of the index number. This quarterly average is then expressed relative to the base of the third quarter of 2015. A brief analysis reveals that, over time, the views of the economists show the greatest variation, followed by the media data. The respondents in the BER survey reveal less variation in their responses and report a high level of political constraints facing businesses. Over the past 5 years, the PUI has tracked major events, as shown in . The index spiked at the times of 'Nene-gate' in the fourth quarter of 2015, in the run-up to the ANC elective conference in the fourth quarter of 2017, and again at the start of the COVID-19 pandemic in the first quarter of 2020. It also captured the 'good news' of 'Ramaphoria' in 2018 and that of the recent economic reforms. What does policy uncertainty mean for business? For a small country, South Africa is on the whole well served by a credible spectrum of economic and business indices, from both official and private sector sources. In a 'mixed' economy, in which government inevitably plays a significant role, the private sector in particular needs appropriate analytical tools to unpack the policy environment. These tools should now include those that help to calibrate the level of policy uncertainty in the economy during any one period. To the degree that rising levels of policy uncertainty have recently been revealed, the PUI emerged as another useful analytical device capable of filling the gap in policy uncertainty assessment. Furthermore, as mentioned earlier, the accompanying narrative is intended to create an economic perspective on each PUI number. What the empirical evidence so far suggests is that business can adjust even to weak policies; alternatively, it can work around them where necessary. Business is capable of less-than-optimal responses, but not if faced with persistent uncertainty or inconsistency. This tends over time to cause the corrosion of many business decisions, especially investment ones. The following comment by a leading business publication on the government's recent proposal regarding the possibility of a basic income grant illustrates this point: Here, it's a question of affordability, and the government should know at this point whether it's doable or not. Yet, it hasn't said, either way. This helps nobody. What confuses investors is the absence of certainty - not necessarily whether the decisions are right. Unfavourable choices can be prepared for, or 'priced in'. What investors want, more than the wisdom of Einstein or gimmicky slogans (think 'New Dawn') is certainty. (Mkokeli 2021:1) To the extent that investment decisions are not always fully reversible, open-ended and uncertain policies make a 'wait-and-see' attitude an option with value - in other words, to delay and wait for more information before firm commitments are made or other opportunities sought. As illustrates, there is no perfect fit between the PUI and investment, but the relationship is indicative and corresponds with the link found in other parts of the South African literature. For example, the decline in the PUI in 2016 was followed by increases in Gross Fixed Capital Formation in 2016 and the first half of 2017. The picture in 2018 and 2019, before the Covid-19 pandemic is less clear. The value of the index increased over that period, but investment initially proved resilient before declining later on. There may well also be other factors explaining the weak performance of private fixed investment in recent years. Yet it is difficult to overlook the unequivocal symptoms of policy uncertainty playing a key role. For example, the build-up of corporate cash reserves to what appear to be excessive levels is not, as critics often say, a sign that South African investors are 'on strike'. This 'liquidity preference' should rather be seen as one likely barometer of reactions to excessive policy uncertainty. Cash reserves then rise until certain policies are clarified and more certainty is provided. 'For as long as you have that heightened policy uncertainty you will have companies sitting on cash and not investing', the governor of the South African Reserve Bank, Lesetja Kganyago cautioned (Donnely, 2021:1). If policy uncertainty remains too high for too long, it can even lead to disinvestment or businesses seeking investment opportunities outside the borders of South Africa. The National Treasury growth document (August 2019) acknowledges that policy uncertainty could reduce domestic investment and outlines some policy steps to address it. It is likely that the same uncertainty factors applying to domestic investment would apply to foreign direct investment. A special World Bank ([2017] 2018:32) report published in 2018 on 'Foreign investor perspectives and policy implications' confirmed that: … [P]redictable government conduct is at least as important to multinational corporations as countries' laws and regulations. Investors cited the importance of transparency and predictability in the conduct of government agencies as the most important among investment climate factors. Investors also look at implementation and administration of those policies'. [emphasis added] What chronic policy uncertainty therefore does, is constantly increase the risk that the best forecasts made by businesses about their future plans will turn out to be wrong. If policy is subject to continual and uncertain changes, then business confidence will be shaky. The confidence with which businesses make their predictions, depends on their estimates of the seriousness of these imperfections and limitations. Business confidence then becomes a potential transmission instrument of policy uncertainty to investment decisions. Investor confidence is likely be more affected because of its long-term nature, while the daily mood in business circles is probably less affected. Load-shedding and a lack of energy security, for example, are damaging to long-term investment because of the uncertainty that they create. In the short term, of course, it is also extremely disruptive to day-to-day business activity, but coping strategies can be and are adopted by many businesses to adjust to recurrent phases of load-shedding. Generally, if alerted by the PUI - and depending on the nature of the uncertainty or 'shock' - businesses may decide whether to adopt 'hedging' or 'rebalancing' strategies to deal with the new situation. A firm's response to a 'shock' may be a question of financing versus adjustment. This will be decided by the firm's degree of flexibility and adaptability, as well as its access to resources and its market position. It also depends on whether business decision-makers see the 'shock' or uncertainty as temporary or chronic. It can be added here that a large firm may hope that by averaging perceived risks among many ventures - some doing better and others doing worse in the face of elevated policy uncertainty - it will still be able to take positive decisions and pull through. A small firm is more vulnerable and may easily face disaster if caught unawares, as it is operating on a much narrower base. The risk of disaster means that a small firm must give special attention to addressing the impact of policy uncertainty, where that is possible. Overall, however, persistently elevated levels of policy uncertainty dampen what Keynes (1936) calls business persons' 'animal spirits - of spontaneous urge to action rather than inaction'. It seems better to keep policy uncertainty to a minimum and out of negative territory, wherever possible. As previously emphasised, if decision-makers find themselves in a situation in which they believe that the future is too uncertain to commit resources, they may simply delay or even abandon the decision to invest. It then inhibits the potential of SA becoming a preferred investment destination. Officialdom in South Africa has not ignored the problem. Government increasingly recognised policy uncertainty as a serious challenge and emphasised the issue, such as in the State of the Nation addresses, Budget speeches and key policy statements, and at official investment conferences. Business spokespersons increasingly found it also important to cite policy uncertainty in their public statements and in their advocacy about the economy to the authorities. The fact that the government recently again announced an Economic Reconstruction and Economic Recovery Plan for South Africa may be seen as a serious effort to respond to these concerns and to seek to inject more certainty and direction into the economy. The problem is not so much that the government at the highest level does not acknowledge the value of policy certainty. Indeed, former Minister of Finance Tito Mboweni tweeted (23 November 2020): I don't know how to explain this anymore Economic agents: investors, businesses, consumers, buyers and sellers of goods, farmers, the market etc, need policy certainty. FUNDAMENTAL. I invest because I will harvest in x years in the forward market. CONFIDENCE! (NWU Business School PUI, 2Q 2021 [emphasis in original]) It is rather that the inconsistency and implementation risks are still high, despite the commitment to new economic 'plans'. Policy uncertainty in South Africa remained at elevated levels for too long. Not knowing what the government may do next has become a serious negative factor in the macroeconomic environment, now aggravated by uncertainties arising from phenomena such as COVID-19 and civil unrest. Conclusion The emergence of greater policy uncertainty both globally and domestically in recent times is a strong reminder that, in their day, both Knight and Keynes believed that pervasive 'radical uncertainty' was essential for an understanding of how a capitalist economy worked and that its role should not be underestimated. The distinction between risk and uncertainty, however, has become lost in subsequent economic theory and analysis, as more faith has been placed in probabilistic reasoning and modelling than in assessing an uncertain future. As to why and how this has happened must be explored in a different paper. Against this background, this paper, nonetheless, offers the following five insights. Firstly, the paper accepts that much of the previous academic literature on uncertainty and investment, especially that dealing with management theory, was tied to the conventional notions of the possible future behaviour of competitors and consumers in shaping business strategies. However, an additional dimension is created when official policy and a changing macroeconomic environment become more dominant in the economic context. Hence, this paper examines the extent to which elevated levels of policy uncertainty have now increasingly come to revolve around who will make the broad economic policy decisions, what policy decisions will be taken and when, and the economic effects of policy action (or inaction). Both recent economic analysis and empirical evidence suggest that high levels of policy uncertainty or 'shocks' may act like a tax on investment, while also inhibiting other business decision-making. Therefore, a country's policy environment can either offer the degree of predictability that minimises uncertainty for business decision-makers or it can instead operate in ways that strongly elevate policy uncertainty. The level of policy uncertainty, therefore, matters and emerges as one of the key elements shaping the dynamics of private capital formation. The complexity of the policy analysis in these situations, nonetheless,s needs to be further interrogated, especially the criteria for better governance and other decision-making processes that might minimise policy uncertainty. Secondly, the paper argues that unless business decision-makers are willing to make random choices, they must make an effort to predict possible outcomes. In doing so, they are faced with three kinds of uncertainty: (1) uncertainty about their current environment; (2) uncertainty about the course of future events; and (3) uncertainty about the reliability of the data they possess. It depends, as Keynes (1936) put it: [O]n the confidence (emphasis in original) with which we rate the likelihood of our best forecast turning out to be quite wrong. If we expect large changes but are very uncertain as to what precise form these changes will take, then our confidence will be weak. (p. 148) Thirdly, the paper outlines how the recent emergence of policy uncertainty indices globally, and in South Africa, helps to fill a gap in the assessment of policy environments and how policy uncertainty may be better managed. It provides another analytical tool with which to understand the policy environment. A PUI captures the 'bad news' not attributable to other factors or variables. Calibrating policy uncertainty has the potential to act as an 'early warning system' to decision-makers about both negative and positive developments in the policy environment in which they operate. It therefore creates a new intersection of thought between management theory, economic analysis and the need for effective institutions. Fourthly, the paper highlights the extent to which the universal element in the different proxies used to track levels of policy uncertainty lies in media reporting. It also emphasises the importance of asking business people about the degree to which official policy decisions and actions, taken by governments, are perceived by business to be unpredictable, unique or unforeseeable. This creates scope for further development of the PUI in the direction of big data. A number of studies already linked the big data generated by social media to stock market movements and investor sentiment. Similar methods can be used to further explore policy uncertainty. Recent developments in South Africa appear to reinforce the need for an expanded narrative. Finally, although a robust relationship between policy uncertainty and investment plans appears to have been established, this paper suggests that further research on the role of policy uncertainty in general and the PUI in particular may throw more light on the response of firms as adaptive organisations. On the upside, it was Knight who believed that it was 'radical uncertainty' that also created positive opportunities for entrepreneurs and that it was their skill and luck in navigating radical uncertainty that drove technical and economic progress. This might be seen to be aligned with Joseph Schumpeter's (1942) subsequent view of 'creative destruction' as an inevitable phenomenon driving the capitalist system. Nonetheless, as a defensive strategy, further interrogation may also help to identify new options available to business people to allow them to plan their affairs so as to make their firms less vulnerable to (what may be perceived as) highly uncertain policy conditions. In other words, uncertainty is not just accepted by businesses as a given quantity; instead, businesses choose appropriate alternatives to mitigate uncertainty, in line with their best interests. In this regard, business people may follow policies that increase their knowledge of, and control over, variables that are potential sources of serious disturbance. They may also organise their operations, relying on flexibility and adaptability, so that uncontrollable variables or uncertainties cannot have too damaging an influence. In short, coping is an entirely rational response to the accepted reality that the world is uncertain. This paper, therefore, ultimately seeks to move the debate forward on how a PUI and its future refinements may assist in tracking and framing the socioeconomic issues with which business and political leaders are faced, particularly 'unbounded' or 'radical' uncertainty, and identifying possible ways to understand and manage policy uncertainty better.

Economic Stability Definition Economic stability refers to a situation where all the essential economic resources of a country are available to its citizens, and no economic swings interrupt their daily lives. It helps achieve macroeconomic objectives like reducing unemployment, balance payments, price stability, and sustainable economic growth. Economic disruptions alter economic stability through inflation, deficits, recession, political riots, and policy changes. Therefore, the government constantly monitors and eliminates deviations in an economy to keep it stable and growing. The common indicators include GDP, , interest rates, consumer prices, etc. Economic Stability Explained Economic stability is an essential factor that affects citizens’ lives. It is an indicator of a healthy economy, free from disruptions. Economic fluctuations can be financial, political, social, legal, or technological. Thus, a country should prepare to minimize its vulnerability to economic troubles. Maintaining stability in an economy is very important as it creates confidence and certainty in the minds of the investors who want to invest in and technological resources. Moreover, the government can identify the indicators of a stable economy and control them. The stabilization measures, such as fiscal or , help keep the economy on track. So, the government may adopt an easy or according to financial needs. Factors Affecting Economic Stability Let us look at the factors impacting the economy: [table omitted] Economic Stability Indicators As and stability are closely related, a growing economy should be first stable first and then progressing second. Thus, the prime indicators of economic stability are similar to that of economic growth, and they are: GDP – The is a crucial indicator. It depicts the level of of a country. Higher income reflects high economic growth. Consumer Prices – These act as an indicator for shortages or surpluses of resources that influence consumers’ and institutions’ responses to the changing markets. Everyone is better off when consumer prices are stable. Employment Rate – The rate of employment or unemployment shows the degree of economic activity. It accounts for the number of people sitting idle without contributing to the economy. Rate Of Inflation – The inflation rate is perhaps a more reliable indicator of stability in an economy. Mild inflation is necessary for an economy, but a high inflation rate can put the economy at risk. In addition, high inflation hinders or stops from other countries as money and assets lose value. Interest Rates – Low-interest rates on borrowing will propel and encourage money supply, which maintains stability in the economy. Level Of Debt – The shows the health of an economy. Debt is necessary as it ensures . However, too much debt can threaten the economy and disrupt economic stability. Public Expenditure – The effects of public expenditure on economic stability are numerous. Government should adequately spend in those areas where the focus is required to sustain financial stability. Fiscal Deficit – The arises when government expenditure exceeds . It can harm the economy as it will reduce economic spending. The government will borrow funds to finance the deficit. A lower deficit implies better stability. Trade Deficit – refers to the value of imports over exports. A healthy economy should have higher exports than imports to ensure more money flows into the country. However, inconsistencies arise when the equation is disturbed. HDI – The Human Development Index presents people’s living standards, education, health care, and overall development. Thus, literacy, life expectancy, and infant mortality rates come under HDI. Along with these, other indicators are currency exchange rates and world stock prices. As these indicators progress, the economy achieves stability. Therefore, the government should monitor them constantly and make necessary amendments to improve the economy. Example Here are some economic stability examples to understand better the concept of economic stability: Example #1 Country X is a developing economy that has always shown a sign of a stable economy. However, some disturbances due to technological innovations have impacted the economy of this country. Furthermore, the mechanization of manufacturing industries reduced the requirements for laborers. Many people lost their jobs, and some even fell into poverty. In addition, it reduced the demand for non-essential goods, decreasing business income and downsizing the workforce. Thus, the technological wave destabilized the economy. The government introduced many stabilization policies, like the , but the economy took a long time to recover and gravely affected many sectors. Example #2 Economic stability in the Philippines is a case worth mentioning. The Philippines was one of the fastest-growing economies pre-COVID-19. However, due to the pandemic-induced lockdowns, the country’s GDP decreased by 9.6% in 2020. Under President Ferdinand Marcos Jr., the newly elected government introduced a series of measures to revive the economy. As a result, the country marked an in the first quarter of 2022. Example #3 In 2022, the disruption in the energy and food sector, supply-side shocks, and declining consumer sentiments can cause economic downturns in the United States. Economists at Nomura Holdings Inc. estimate that the U.S. might face economic instability due to a mild recession in the fourth quarter of 2022 as the Federal Reserve tightens monetary policy to curb inflation. As a result, they project a decline in the economic growth of in the fiscal year 2023 rather than 1.3%. At such times, the impact of the monetary and fiscal policies will be limited, but the excessive savings and consumer balance sheets will keep the effect of the mild recession. Why Is It Important? The benefits of a stable economy can speak for its importance: More employment opportunities – Everyone’s participation is essential for a steady economy to work efficiently. It increases the for labor and, thus, increases employment. Increased public expenditure – Economic stability contributes to monetary gains, which allows the government to spend more on its citizens. It provides free education, health care, sanitation, and other public services. Improved living standards – Jobs for everyone and easy access to public goods offer a better life for the citizens. They benefit personally and socially. It also helps bring people out of poverty by giving them a fair and equal chance. Attracts FDI – A stable economy benefits everyone. Therefore, foreign investors and businesses wish to invest their funds in such an economy. Income inequality – The often goes unnoticed in a country. But a stable economy also focuses on equal distribution of income and . It is essential because every citizen is a part of an economy, and collective, inclusive growth is an economy’s growth.

The thing that is crucial to recognize is that we, society as a whole, are extremely dependent on the actions of investors because of what has been called the "privileged position of business" (Llndblom, 1977). Adam Przeworski (1985) describes the dilemma particularly well. Consider, he says, the perspective of a democratically elected left-wing government. The fundamental problem of which, and the main reason why progressive reform is consistently so hard to achieve, is the problem of investment. To see why this is so recall that left governments lend to get elected by a broad coalition of unionized workers, students, retirees, the unemployed, and others on a range of promises to increase wages and pensions, improve workplace and environmental regulations, and so on. However, these policy reforms inevitably bite into profit margins. So as soon as the government starts implementing its promises, private profits start falling (because, for example, business owners become forced to pay higher minimum wages, grant maternity leave, clean up their pollution, pay higher taxes, etc.). This reduces their incentive to invest (why would one go through the effort of investing if one were unlikely to profit from it?). If the government changes are drastic enough, and business confidence becomes seriously shaken, investment rates can plummet. Companies lay off their workers, cut back their activity, and stop buying products from other firms, which makes those downstream firms lay off workers too. So the amount of taxable revenue going to government starts to shrink, resulting in less money to fund the social programs that the government promised. Recall that there can only be social programs like welfare if there is sufficient investment and productive activity happening to tax to pay for it. Wealth has to be produced before it can be redistributed. So those who want welfare find that they have a direct interest in making sure production happens steadily. This means that, given private control of investment, even the most radical welfare-rights organizations, for all their anti-capitalist rhetoric, are still dependent on business proceeding basically as usual. So with mass layoffs on one side, and deep cuts to social programs on the other, the average person may well conclude that she was better off under the former conservative government—at least then she had a job. If the investment crisis continues, the population comes face-to-face with a stark choice: be progressive and starve or reactionary and eat. The investment crisis swells into an economic crisis which fractures political coalitions, leaving left-wing governments facing a crumbling economy, mass unrest, and even a right-wing coup (Chile under Allende is a classic example of this). This, then, is the paradox: the very capacity of left governments to intervene in the economy depends on the profits of the businesses which bear the intervention. Przeworskl (1985) puts it this way, "This is the structural barrier which cannot be broken: the limit of any policy is that investment and thus profits must be protected in the long run" (p. 42). Another way to see this "paradox of investment dependence," as I call it, is to recognize that, on the one hand, employees and employers usually have opposing interests: lower wages = higher profits. On a deeper level, however, employees are dependent on their employers being happy, because if they are not, if profits are falling and confidence is shaken, then investment slows and everyone suffers. Employees thus find themselves in the paradoxical situation of having to care about the happiness of their bosses, and mitigate their own demands for improvements, because they are dependent on their employers continuing to invest. This means that what is good for the employer is usually bad for the employee, but, and this is the paradox, what is bad for the employer is usually worse for the employee. So the private control of investment means that workers find themselves in a structural straightjacket, unable to protest the inequities of their circumstances too vehemently without risking making themselves even worse off. This is what l.indblom (1982) meant when he called the market a "prison." So in normal limes, the stability and growth of the economy depend largely on the profit levels and the confidence of business owners who are making investment decisions. Profit-seeking private investment is the engine of economic growth. This means that government policy is ultimately constrained, and popular sovereignty ultimately undermined, to the extent that the government cannot risk overly undermining business profits or confidence. This is why governments, even progressive ones, find it so difficult to make important social justice advances, like redistributing wealth—because what would happen if they tried? Any attempt to engage in substantial redistribution would be less likely to generate actual equality as it would be to lead to investment slowdown and economic recession. As long as investment decisions remain predominantly in private hands, we would get collapse and depression far before we would get equality.

Changes in consumer or business confidence can impact aggregate demand. If individuals believe the economy will perform poorly in the future, they are likely to increase how much they save to prepare for lean times ahead. The associated decrease in spending would lower aggregate demand. Similarly, if businesses perceive that the economy is about to enter a recession, they are less likely to make investments in new machinery or factories because consumers would not be able to afford their new products during the recession. These types of changes in behavior can occur spontaneously and be the proximate cause of recession. These types of behaviors can also result from a specific shock and further deepen the shock’s demand impact.

March is coming and the tax debate will once again be at the forefront of the legislative discussion. On the 7th and 8th of next month, the Chamber of Deputies will have to vote on the tax reform bill, and then continue the discussion in the Senate Finance Committee, in its second legislative procedure. One of the issues that generates the most criticism from the opposition and the business sector is the tax on high net worth individuals, as they consider that it will affect investment and savings by taxing the stock of resources. In view of this, the Minister of Finance, Mario Marcel, said that "if the opposition thinks that this tax has a series of problems, then it should put forward an alternative proposal, but one that maintains the objectives of collection and progressiveness", as he said in an interview with Pulso at the end of January. And although the opposition has not yet come up with a proposal to replace this tax, some options have begun to emerge from the business community, which will be presented when invited to the Senate Finance Committee. And it was precisely the president of the Confederation of Production and Commerce (CPC), Ricardo Mewes, who stated that one of the alternatives that the sector is considering presenting is to replace the wealth tax with a one-point increase in the tax paid by large companies. Although he said that this proposal has already been outlined to Minister Marcel, the calculations of how much would be collected in this way are still missing, in order to present it formally to the Treasury. For the business community, the main thing is to modify this wealth tax, because it affects the stock and this in turn has implications for investment and savings, they say. Therefore, the alternative formulas will be focused on mechanisms that tax flows, such as the corporate tax. Currently, the first category tax paid by large companies in the semi-integrated system is 27%. The owners or partners are entitled to a 65% credit, i.e., they can deduct 65% of the 27% paid by the company from their personal income tax. This tax is already considered high by several experts when compared to the average of the OECD (Organization for Economic Cooperation and Development) countries, which is 23.7%. Less bad For the same reason, the CPC's proposal immediately opened a debate among tax experts and economists, who, although they do not fully agree that this is the solution, see it as a "lesser evil" compared to what would be the application of the wealth tax. Although the experts admit that a one-point increase in the corporate tax would raise between US$350 million and US$450 million per year, which is equivalent to between 0.12% and 0.16% of the Gross Domestic Product (GDP), and would therefore be less than what the government expects to raise with the wealth tax -0.48% of the GDP, some US$1,500 million-, they affirm that these resources would be "more feasible to raise". This, considering that the logistics are already in place compared to the other tax, which is more complex to control. In addition, they argue that the Treasury's calculations in this respect are somewhat overestimated. Patricio Rojas, an economist at Rojas y Asociados, indicates that the CPC's approach is in the context that the wealth tax is very negative. "It does not mean that it is the best option, but it is the lesser evil," he says. For the economist, although the government is projecting to raise US$1.5 billion with its formula, that figure is highly questionable. "There is no certainty that it will collect what it is proposing. The vast majority of these taxes in the countries where they have been applied have been lower," he says. On the other hand, he says that one more point in the corporate tax "we know that it raises US$400 to 450 million". Sergio Lehmann, chief economist at Bci, indicates that "the corporate tax may be a better alternative, but it also implies a high cost. Its current level exceeds the average of the OECD countries and could therefore be a disincentive for new investments, by affecting the relative competitiveness of our economy. It would therefore have an effect on the long-term growth capacity of the economy". He points out that "an important problem with the wealth tax is the control and valuation of assets. For the same reason, in addition to the distortions caused, it effectively entails uncertainty in tax collection. This is not the case with the corporate tax, for which there are greater certainties based on strict accounting rules". Lehmann argues that "there is no doubt that the wealth tax introduces strong distortions, generating incentives for capital outflows and the establishment of residence abroad in the case of the most affected individuals". In this sense, he adds that "international evidence is conclusive in showing bad experiences in this matter, recognizing a low collection and frictions that impact the capital market and, therefore, the economic development. In several countries, for this very reason, after recognizing the negative effects of this type of taxes, they have been eliminated after applying them temporarily". The tax experts Javier Jaque, partner of Consultoría Tributaria CCL AC Auditores Consultores, states that "the wealth tax has been shown not to be efficient in different parts of the world. And therefore, versus the income tax which, although it is not optimal, is something more accepted by the industry, it is more feasible to collect through the corporate tax than through the wealth tax". Ignacio Gepp, partner at Puente Sur, agrees with his peers, as he also sees it as a lesser evil: "In terms of the impact on investment, the lesser evil is a corporate tax. In this sense, the analysis made by the CPC is correct, because between these two taxes, the one point increase in the corporate tax will generate a lower impact on investment, compared to the one applied to wealth". Among those who believe that this solution is bad and do not validate it is the partner Leader Tax & Legal of Deloitte, Hugo Hurtado. "The corporate tax is high and therefore, there is not much more room. The solution does not go that way and it also has an impact on investment", he accuses. In addition to this opinion, Sebastián Guerrero, partner of Guerrero Garcés, categorically rejects it: "I think it is a bad idea. Faced with a terrible instrument such as the wealth tax, the answer cannot be to increase even more the first category tax, which is already among the highest in the OECD. Today we need to encourage investment and this points in the opposite direction". The wealth tax proposed by the government aims at taxing residents or domiciled in Chile with a tax on the part of the wealth that exceeds 6,000 UTA (US$4.9 million). This regulation also contains guidelines that allow taxpayers to determine the economic value of their assets, understanding as economic value that which was determined by independent third parties. The rate applied varies according to the amount of assets: up to 6,000 UTA, US$4.9 million, is exempt, between 6,000 to 18,000 UTA (US$4.9 - US$14.7 million) will have a rate of 1% and those who have assets over 18,000 UTA, that is more than US$14.7 million, will have a rate of 1.8%. In the discussion, the exit tax was eliminated for those taxpayers who lose their domicile, but the obligation to inform in order to be excluded from the tax is maintained. Also, the wording was clarified to establish simpler rules, without losing the correct determination of net worth. And a limit to the tax burden of 50% of the income considering the effective rates of income tax and wealth tax was proposed. According to government estimates, 6,383 taxpayers will be subject to the wealth tax, and a collection of 0.48% of GDP is expected.