M.Comm. (Financial Economics) / The term structure of interest rates, particularly the term spread determined from the difference between ten-year government bond yields and three-month Treasury bill yields, has received increased attention as a valuable forecasting tool for the purposes of monetary policy and recession forecasting. This is on the back of the observed positive relationship between term spread and economic activity. Moreover, the term spread has been observed to invert prior to the occurrence of economic recessions both in developed and developing countries. This study investigated the forecasting ability of the South African (S.A.) term spread in predicting S.A. recessions, taking into account the recent global economic recession. The reason behind the investigation is due to the forecasting consistencies illustrated by the term spread in providing statistically incorrect signals of recession in 2003, which did not transit into reality. It implied a weak relationship between the S.A. term spread and economic activity. Moreover, based on observations from the literature that term spreads and economic activities across countries are correlated, the term spreads of China, United States (U.S.) and Germany were investigated and compared to the S.A. term spread, to determine which better forecasts S.A. recessions. The study employed the Dynamic Probit Model, since it is considered to provide a better predictive edge over the Traditional Static Probit model. The findings revealed that the S.A. term spread accurately predicted all the S.A recessions since 1980; Chinese term spread accurately predicted the 1996 and 2008 S.A recessions; U.S. term spread predicted some recessions; while German term spread predictions were countercyclical.

M.Com. (Financial Economics) / The use of the yield curve spread in forecasting future recessions has become popular as it is a simple tool to use, due to the positive relationship between the yield curve spread and economic activity. The inversion or flattening of the yield curve spread usually signals a future recession. This has been the subject of several studies both internationally and in South Africa. This research provides an analysis of the yield curve spread’s ability to accurately forecast future recessions in South Africa through the use of three probit models. Furthermore, the yield curve spread’s ability to estimate is compared to that of share prices, using the JSE All Share Index. This research extends on studies by Khomo and Aziakpono (2006) and Clay and Keeton (2011), who used the static and dynamic probit models to forecast recessions in South Africa. In addition to these models, this research also makes use of the business cycle conditionally independent probit model for estimation. The findings suggest that share prices improve the yield curve spread’s ability to forecast recessions when estimating using the static probit model; however when comparing the results between the financial variables, the yield curve spread continues to produce the best forecast of recessions in South Africa. These results support those of Khomo and Aziakpono (2006) and Clay and Keeton (2011). Of the three probit models, the dynamic probit model estimate using the yield curve spread produced the most accurate forecast of recessions one quarter ahead. Therefore, the yield curve spread continues to provide the most accurate forecast of recessions in South Africa.