A critical evaluation of the role of consumer and business confidence in the business cycle of the UK

Abstract

Using quarterly data for the UK, spanning the period, 1990q1-2020q1, the study examines whether indicators of consumer and business confidence help in the prediction of future fluctuations in GDP over the business cycle. The econometric approach adopted include cross-correlation, probit and VAR. The results indicate that both consumer and business confidence are procyclical to GDP growth, confirmed by the positive cross-correlation over four quarters. Similarly, the study also find that the confidence indicators are meaningful in the prediction of future recession up to four quarters. However, with regards to the predictive power, confidence indicators are not statistically in quantifying future GDP output.