Does the financial market lead the business cycle in South Africa?

Abstract

Financial markets play a significant role in an emerging market economy such as South Africa, especially after financial liberalisation. Financial liberalisation causes economies to interrelate across borders and between different sectors. The impact of this interrelationship can be captured by taking the different components of the financial market into account and relating these to the real sector, using the coincident indicator. It will be useful to identify an indicator representing the major components - equity market, capital market and the domestic financial sector - of the financial market in South Africa. This financial indicator will lead the coincident indicator, because the components of the financial indicator are available at a higher frequency than the components of the coincident indicator. This new indicator for South Africa will be of assistance in making more informed business decisions since it can be used to forecast turning points in the coincident indicator, i.e. the business cycle.