Obtaining Clear and Timely Business Cycle Turning Point Signals With a Composite Leading Business Cycle Indicator

Abstract

The upward phase of the South African business cycle that followed the global financial crisis gradually lost momentum from 2012 onwards, resulting in a peak in the business cycle being reached in November 2013. The subsequent downward phase has so far lasted for 48 months, up to November 2017. The gradual loss of momentum in domestic output growth was not widely recognised by many economists, judging by consensus forecasts of annual GDP growth. However, the South African Reserve Bank (SARB) composite leading business cycle indicator reached a peak in February 2011 before trending gradually lower, suggesting a continued deterioration in output growth. The leading indicator reached a trough in April 2016, suggesting an imminent end to the downward phase of the business cycle, in line with consensus forecasts. However, output growth slowed further with the economy experiencing a technical recession. This paper employs the indicator approach to business cycle analysis in order to establish whether the current downward phase in the South African business cycle could reasonably have been predicted, and also whether the recent strong increase in the composite leading business cycle indicator provided a clear signal that the current downward phase might have ended. The results show that closer analysis of the leading indicator and its subcomponents would have revealed that a broad slowdown in the South African economy was underway since 2012. Also, the recent upward trend in the leading indicator did initially signal the end of the current downward phase in the business cycle in an unambiguous manner. However, the anticipated business cycle recovery appears to have been postponed by idiosyncratic exogenous factors.