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Political uncertainty and the impact upon business

Bridget Holmstrom - Sunday, February 22, 2015

What is the impact of political uncertainty upon business

There seems to be a great deal of uncertainty in the air at the moment.  Will the Greeks stay or leave the Eurozone, the Ukraine where there is fighting with separatists almost certainly supported by Putin, the UK election in May, the insecurity created by IS in Syria and Iraq.  Indeed who will win the UK election and will we have a referendum, will the UK leave the EU.  What is clear is that uncertainty affects decision making.  For example, Enterprise Inns has stated that because of the continued uncertainty around the pubs code and the possible scrapping of the beer tie it is now moving their capital investment away from long term agreements to short term agreements.

Business likes certainty because this means that they can forecast the level of sales with a fair degree of accuracy.  When sales can be accurately forecast so can expenses, profits and most importantly cash.  Decision making for investment in the future becomes easier when you are confident on the level of resources required to keep the business running on a day to day basis.  As political uncertainty increases so business owners become less certain of the revenues that they are likely to see over the coming months and years.  It can appear that sometimes this lack of confidence can be driven more by emotion than by facts. 

Studies have shown that during election years, compared with non-election years, companies reduce investment by 4.8%.  Studies have also shown that there is a risk premium associated with elections and that this risk is amplified during periods of economic.  This means that even during periods of prosperity an election will cause uncertainty and during economic recession this uncertainty is much greater.  

A stable government will provide a degree protection to the financial markets, upcoming elections reduces the value of this protection and so the volatility of stock is likely to increase.

This uncertainty means that the very act of having an election will serve to suppress investment by business, and possibly by the public sector as well.  We don't want significant spend on large projects if the incoming Government decides to cancel the project.  As an aside, it may surprise the Government that there may well be a significant cost associated with cancelling a project that must be budgeted for.  The next few months will see uncommitted projects put on the back burner until the political landscape becomes more clear.  Of course, should there be a hung parliament the period of uncertainty is likely to be extended well beyond Election Day