Increase in oil prices shatters business confidence—empirics prove

In general, empirical assessment of the determinants of business confidence across countries is just budding, especially since the last decade. Moreover, the extant studies are more concentrated on macroeconomic variables (inflation, interest rates, output) and, to an insignificant extent, political factors, with strong evidences of their impacts accordingly established. Against limited evidence in the literature, however, we take a departure from extant studies by enquiring into the influencing role of economic policy uncertainty and oil shocks on business confidence in the Organisation for Economic Cooperation and Development (OECD) countries. While there is hardly any economic sector and business activity that seems to be disconnected from oil, the construction of the US economic policy uncertainty index in 2016 by Baker et al. [] has led researchers to reveal how it affects the macroeconomy which cuts across the economic, finance and business spheres. We suspect that these global factors would also matter for business confidence.

Mokolo and Seetharam [] note that uncertainty tends to linger in the sub-conscious mind of different business stakeholders including company executives, clients and policy makers in relation to the future outlook of business activities. The implication is that economic policy uncertainty could adversely affect prices, consumption and outputs (see Alam, []), all of which are strong determinants of overall business performance. More succinctly, increase in economic policy uncertainty creates a shady environment for business as investors’ risks tend to increase while business profitability has the likelihood of falling. On the other hand, oil serves as a critical production input and aid for business performance. However, due to frequent economic and financial turmoils, oil prices have been plagued with multiple shocks over time []. For instance, the two consecutive oil shocks in the 1970s, the global financial crisis of 2008 and the oil price collapse of 2014–2015, among others, have proven that risks arising from the crude oil market could have detrimental effects on economic activities and outcomes, business conditions and investors decisions (See [, , ]. Generally, a rise in oil price depresses economic activity as production and investment costs simultaneously rise. This further adversely affects consumers as they reduce consumption following high cost of goods and services induced by the higher price of oil []. The summation of these effects is that they create fears in market participants, thereby influencing the confidence investors and entrepreneurs have in businesses as regards future expectations.