The South African yield curve as a predictor of economic downturns: an update

Abstract

This study re-examines the yield curve’s forecasting abilities in South Africa and investigates its ability to predict the most recent economic downturn of 2007/09. The study builds on the earlier work of Nel (1996) and Aziakpono and Khomo (2007) who found that the yield curve does accurately forecast downswings in the South African economy. It confirms Aziakpono and Khomo’s finding that the yield curve falsely predicted a downswing in 2002/03, but provides evidence that the yield curve has not lost its predictive powers in the most recent downturn of 2007/09. The simple and modified probit models are used to examine the yield curve’s ability to forecast economic downturns. This is compared to the forecasting abilities of the JSE All Share Index, the SA Reserve Bank’s leading economic indicator and M3 money supply. The yield spread was better able to predict all the downturns since 1980 than any of the other variables. The best forecast is found to be 2 quarters ahead. This indicates that the yield spread is still a powerful forecasting tool for predicting economic downturns in South Africa.