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The main purpose of this paper is to construct a financial conditions index (FCI) for South Africa. The analysis extracts the index by applying two alternative approaches (principal component analysis and Kalman filter), which identify an unobservable common factor from a group of external and domestic financial indicators. The alternative estimated FCIs, which share a similar trajectory over time, seem to have a powerful predictive information for the near-term GDP growth (up to four quarters), and they outperform the South African Reserve Bank’s (SARB) leading indicator as well as individual financial variables. Their recent dynamics suggest that following a strong recovery in late-2009 and 2010, reflecting in part domestic factors such as systematic reductions in the policy rate, the rebound in real economic activity, and a benign inflationary environment, the financial conditions have deteriorated in recent months, though not as sharply as in end-2008. Given their relatively high predictive power regarding GDP growth, a further deterioration may imply that economic activity is likely to slow in the period ahead.

Economic indicators --- Finance --- Funding --- Funds --- Economics --- Currency question --- Business indicators --- Indicators, Business --- Indicators, Economic --- Leading indicators --- Economic history --- Quality of life --- Economic forecasting --- Index numbers (Economics) --- Social indicators --- Financial Risk Management --- Macroeconomics --- Public Finance --- Statistics --- General Aggregative Models: Forecasting and Simulation --- Financial Markets and the Macroeconomy --- Business Fluctuations --- Cycles --- Prices, Business Fluctuations, and Cycles: General (includes Measurement and Data) --- Financial Crises --- Data Collection and Data Estimation Methodology --- Computer Programs: Other --- Trade Policy --- International Trade Organizations --- Economic growth --- Economic & financial crises & disasters --- Econometrics & economic statistics --- Public finance & taxation --- Financial conditions index --- Cyclical indicators --- Financial crises --- Financial statistics --- Post-clearance customs audit --- Financial sector policy and analysis --- Economic and financial statistics --- Revenue administration --- Business cycles --- Customs administration --- South Africa