In any economy, confidence levels influence and provide information on social and financial developments in the future. For companies and the stock market, business confidence indicates expectations of firms, based upon surveys on production, orders, and finished goods in the sector. The business confidence index can also be used to check growth and anticipate curves in economic activity.
Around the world, numbers above 100 suggest optimism in near business performance, whereas numbers below 100 show pessimism. English economist John Maynard Keynes coined the term "animal spirits" to describe the up and downs of confidence among investors and businesses. Companies are asked about their expectations for the months to come in a survey which gives the business confidence average.
In India, the Business Expectations Index is calculated as a weighted net response of nine business indicators, which are overall business situation, production, order books, inventory of raw material, inventory of finished goods, profit margins, employment, exports, and capacity utilisation. This gives an outlook each quarter and takes values between 0 and 200, with 100 being the threshold separating expansion from contraction.
The index is a key barometer and shows the overall health of the economy, drives business growth and investment, supports employment opportunities, and attracts people to the region.
At the household level, unemployment and subdued income growth in some regions is a key concern that affects consumer confidence, while for businesses, sluggish demand and highly competitive operating conditions continue to influence perceptions of resilience and confidence.
Here are various indicators which mark shifts in consumer and business confidence:
1. Changes in interest rates of exchange rates
2. Movements in employment levels and business investments
3. Shifts in the prices of goods and services, such as petrol, healthcare, education, etc
4. External economic or financial shocks, such as the financial crisis of 2008/09
5. Policy shifts in the stance of government fiscal policy, including spending cuts or taxation rates