Forecasting Business Cycles in South Africa

Characterising the SA business cycle, it is fair to conclude that it has been shaped by both discrete structural change (and exogenous shocks) and its inherent regularity (i.e. endogenous cyclical forces). Being a small and open economy, the SA business cycle is sensitive to global influences, via both the trade and financial channels. Often non-economic factors gave rise to the so-called ‘stop-go’ business cycles of the 1970s and 1980s (and first half of the 1990s). However, through all these tumultuous times a certain export and fixed investment-centred business cycle momentum persisted, exerting itself more fully during the 1990s in response to the political change and macro-economic policy improvements. Unfortunately, SA’s longest post-war business cycle expansion was aborted due to the impact of the Great Recession in 2009 and its aftermath. This latter-mentioned period of unconventional monetary policies in the major advanced economies has witnessed heightened financial volatility and poor domestic real economic growth around a 2% tempo (2012–2014). Suffice to note that the two post-apartheid recessions (1997–1999 and 2009) have been relatively mild affairs and the two expansion phases (1999–2007 and 2009–2013) exceptionally long in a historical context. While the discrete structural changes and exogenous shocks render economic forecasting hazardous, this does not imply the endogenous regularity of the business cycle has been suspended. Economic forecasters have little option, but to continue applying their trade. Pondering the future of economic forecasting, econometric models provide the best long-run hope for successful forecasting; however, suitable methods need to be developed in order to improve models’ robustness to unanticipated structural breaks. The indicator approach to economic forecasting provides fertile ground in compensating for this weakness. While the economic forecaster needs to tread carefully beyond a forecast horizon of more than 1 year, sound interaction between science and evidence in the forecasting process, good judgement combined with sound econometric modelling, teamwork and the contemplation of alternative scenarios are all elements of value addition in economic forecasting. Provided these elements, the demand for economic forecasting services is likely to continue to grow.