Banking & Finance

The Consumer Confidence Index (CCI) has been in widespread use in most developed economies of the world since the mid-1970s. The index is calculated on the basis of sample survey data and aims to represent general public opinion on the following:

1. how the public assesses the dynamics of its own material wealth
2. how it perceives the near-term economic outlook
3. what changes it expects to the long-term economic position of the country
4. the dynamics of the overall propensity to consume

The survey procedures are designed to reveal the changes in consumer behaviour and the influence of these changes on future spending and saving patterns. In this way, the CCI plays a substantial role in economic forecasting when consumer behaviour influences the behavior of market and economic processes.

Along with other macroeconomic indicators, the CCI is employed to assess the past economic performance of a country and to forecast future economic developments. Governments use the surveys to evaluate past performance and assist with the formulation of future economic policy. The private sector, meanwhile, uses the data as a reliable indicator when forecasting future demand and sales volumes.

The CCI has other uses in business, however. It helps evaluate factors and risks in terms of demand and the mood of the consumer market so that managers can better plan while taking into account such factors as regional variations.

The start of CCI surveys in Ukraine coincided with the post-Soviet revival of the country's economy, which demonstrated strong growth in 2000-2001 when incomes began rising after the long recession of the 1990s. The index at that time was below 100, which meant that consumers were mostly pessimistic, but the overall trend was nevertheless moving towards overall optimism. A significant watershed came in the second half of 2001 when consumers' economic expectations became mostly optimistic and the Index of Economic Expectations (IEO) in Ukraine exceeded the 100-point benchmark for the first time.

The CCI trend in 2002 and for most of 2003 demonstrated that economic growth in itself was insufficient for consumer confidence in Ukraine to increase much further - despite a steady increase in GDP, the CCI stagnated during this period. The results of the 2002 parliamentary elections were a disappointment for many Ukrainians and reduced their expectations for a stable government and consistent policy. It became evident at this time that the Ukrainian public tended to associate their perceptions of personal financial standing and economic expectations with the political situation - the CCI plunged to an 18-month record low in September 2002 at the very peak of the "Rise, Ukraine!" political campaign.

The acceleration of economic growth in 2003 and record high GDP growth in 2004 provided a new boost to consumer confidence in Ukraine. In March 2004, the CCI broke the 100-point mark and reached a record high of 107.3 in March 2005 when expectations of major government reform after the Orange Revolution were at their highest. By the same token, the CCI reflected public frustration when the Orange parties failed to build a coalition after the 2006 elections, paving the way for the Party of Regions to form a government. In June 2006, the CCI hit a five-year low of 84.9.

Since that time, pessimism has been a permanent feature with the CCI never exceeding 100. This low level of confidence is bound to very pessimistic economic expectations brought about by the near-continuous string of political crises that have dominated 2006 and 2007.

It is noteworthy, however, that Ukrainians do not tend to make a strong connection between their personal well-being and economic expectations: since the end of 2005, the Index of Current Situation (ICS) consistently exceeds the Index of Economic Expectations. This implies that consumers are more optimistic in assessing their personal financial standing. Moreover, the Index of Propensity to Consume shows that Ukrainians’ readiness to buy big-ticket household items consistently exceeds a score of 100.

This disassociation between economic expectations and assessments of personal well-being is not a particularly positive phenomenon as it indicates a degree of alienation by private citizens from the economy as a whole.

As the political crisis persists, it is unlikely that consumer confidence will improve substantially in the near future. The public mood will only improve when politicians reach a consensus on the distribution of political power in Ukraine and the government clearly demonstrates the will to undertake long-waited reforms.

The Consumer Confidence Index was launched in Ukraine in 2000 as a joint project by the marketing company GfK Ukraine and the International Centre for Policy Studies. Initially, the Index was determined on a quarterly basis; since 2005, the survey has been carried out bimonthly.

The Consumer Confidence Index is determined through a random survey of domestic households. The poll involves 1,000 individuals aged 15-59, an age group that represents 61.3% of Ukraine's population and the country's most active consumers. The margin of error is 3.2%.

To define the CCI, respondents are asked these questions:

1. How has the financial standing of your family changed over the last six months?
2. How do you think your family's financial standing will change in the next six months?
3. Looking at economic conditions in the country as a whole, do you think the next 12 months will be good or bad?
4. Looking at the next five years, will they be good or bad for the country's economy?
5. In terms of large purchases for your home, do you think now is generally a good time or a bad time to make such purchases?

Each of these questions is related to a corresponding index:

Index of Current Personal Financial Standing (x1);
Index of Expected Changes in Personal Financial Standing (x2);
Index of Expected Economic Conditions in the Country Over the Next Year (x3);
Index of Expected Economic Conditions in the Country Over the Next 5 Years (x4);
Index of Propensity to Consume (x5).

Indices are constructed thus: the share of negative answers is deducted from the share of positive answers, and 100 is added to this difference in order to eliminate negative values.

On the basis of these indices, three aggregate indices are calculated:

Consumer Confidence Index (CCI) as the arithmetic average of indices x1-x5;
Index of the Current Situation (ICS) as the arithmetic average of indices x1 and x5;
Index of Economic Expectations (IEE) as the arithmetic average of indices x2, x3, and x4.

Index values range from 0 to 200. The index equals 200 when all respondents positively assess the economic situation. It totals 100 when the shares of positive and negative assessments are equal. Indices below 100 indicate the prevalence of negative assessments.

To determine the Index of Expected Changes in Unemployment (IECU) and the Index of Inflationary Expectations (IIE), respondents are asked these two questions:

1. Do you think that within the next 12 months the number of unemployed (people who do not have job and are looking for work) will increase, will remain roughly the same, or will decrease?
2. How do you think prices for major consumer goods and services will change in the next 1-2 months?

The IECU and the IIE are calculated thus: the share of answers that indicate a decrease of unemployment/inflation is subtracted from the share of answers which indicate the growth of unemployment/inflation, and 100 is added to the difference to eliminate negative values. The values of indices can vary from 0 to 200. The index totals 200 when all respondents expect an increase in unemployment/inflation.

It is important to note that the consumer confidence surveys differ from country to country. The differences can refer to the periodicity and the methodology of the survey, the formulation of the questions, the scale of the index. Therefore, the country-by-country comparisons of CCI are usually not reliable.