From the Business Cycle to the Output Cycle: Predicting South African Economic Activity

Substantial literature exists on the ability of various economic variables to predict the turning points of the business cycle. However, comparatively little attention has been paid to predicting turning points in other measures of economic activity, such as the output gap or output cycle. This paper argues that the analysis of business cycles can be supplemented by the behaviour of output cycles, and that turning points in the output cycle presents a complementary source of information relative to the business cycle. The paper derives an output cycle series for the South African economy and compares this series to the business cycle series, as formally constructed and published by the South African Reserve Bank. It then estimates a number of probability models to determine the extent to which two market-determined and readily observable economic variables can predict turning points in the output cycle. This includes the use of currency in circulation as an additional predictor of economic activity, which is found to be a very accurate and useful predictor.