EXECUTIVE SUMMARY 

This policy brief examines the role of business confidence as a predictor of economic development. It focuses on the impact of recent political instability and economic uncertainty, drawing insights from both Georgian data and international experience.

Political and economic uncertainty plays a critical role in shaping business confidence, which, in turn, influences broader economic outcomes. While Georgia currently maintains steady economic growth, ongoing political instability has led to a notable deterioration in business confidence. This decline, as reflected in the Business Confidence Index (BCI) published by the ISET Policy Institute, raises concerns about potential economic downturns, particularly given the established link between sentiment indicators and macroeconomic performance.

Recent weakening of governance, policy inconsistency, and heightened sociopolitical tensions in Georgia have created an unpredictable business environment, dampening both current performance and future expectations. The BCI has been on a downward trajectory for the past five quarters, reaching -5.0 in Q1 2025 - the lowest level recorded since 2020 . 

The Expectations Index component of the BCI has seen a significant decline in Q1 2025, falling by approximately 17 points to -9.9, the lowest level recorded since 2020. This sharp decline is largely attributed to the political turbulence following the controversial October 26, 2024, parliamentary elections, which sparked widespread protests and raised concerns over democratic governance. Ongoing political instability and continued demonstrations have exacerbated economic uncertainty, particularly among SMEs, which have shown consistently lower confidence levels as compared to large enterprises.

Regression analysis performed for the Georgian data confirms that business expectations are a statistically significant predictor of real GDP growth. The estimated coefficient suggests that a 1-index point decline in BCI expectations leads to a 0.067 percentage point decrease in quarter-over-quarter real GDP growth. Given that the Expectations Index declined by 16.9 points in Q1 2025, the estimated annualized impact of current deterioration on GDP growth is approximately -4.5 percentage points. Hence, if the current uncertainty remains or deteriorates further, Georgia faces a risk of sub-2 percent economic growth in 2025.

Although most macroeconomic indicators in Georgia have not yet shown significant deterioration, the sustained decline in business confidence clearly suggests risks to future economic stability. Persistent political instability poses growing challenges for businesses, making long-term planning, investment decisions, and overall economic participation increasingly difficult, ultimately threatening the country’s growth prospects. Measures aimed at addressing political uncertainty, restoring investor confidence, and ensuring regulatory stability, accountability and transparency will be critical in mitigating downside risks to growth.

The document is structured as follows. Section 1 reviews international evidence on the role of business confidence indicators in economic forecasting. Section 2 provides an overview of Georgia’s Business Confidence Index, its methodology, and historical trends. Finally, Section 3 explores the statistical relationship between business confidence and real GDP growth in Georgia, incorporating regression analysis to assess its predictive power.

For the complete paper, please refer to the attached policy document (above).