How do politics affect economic sentiment? The effects of uncertainty and policy preferences

Expectations of consumers and investors are drivers of consumption and investment, and consequently the business cycle. In this paper, we study whether these expectations, as proxied by economic sentiment indicators, are affected by the political environment. First, we study the impact of political uncertainty related to elections and weak governments. Surprisingly, we do not find evidence for a negative effect of uncertainty on consumer and business sentiment. On the contrary, our results suggest that consumer confidence even increases in the forefront of elections. This increase is most pronounced in situations where consumers perceive the economic situation as bad, which suggests that positive expectation effects outweigh the negative uncertainty effects. Second, we study the effect of the political preferences of governments on economic sentiment. As measure of political preferences, we use data on party preferences derived from the content analysis of election manifestos. Our results suggest that during the reign of governments whose platforms support economic orthodox policies, such as fiscal consolidations, consumer and, to a lesser extent, business is subdued. Conversely, consumer confidence increases when governments focus on the strengthening of institutions, whereas business sentiment reacts positively to governments highlighting technology and infrastructure.