“Household debt and consumption spending in South Africa: an ARDL-bounds testing approach

Abstract

While countries in the developed world have experienced a drop in household consumption post the global financial crisis, South Africa’s household debt has been growing rapidly as credit uptake continues to be on the increase. At the same time, increasing borrowing to finance consumption is seen as a stimulating factor for the economy. However, there is concern that high levels of debt may curtail spending in the future and hence in the long-run slow down economic growth. Using the ARDL-bounds testing procedure, the study examines the relationship between household debt and consumption spending in South Africa for the period of 1986-2013 in order to capture the short-run and long-run dynamics. The empirical results show that there is a significant deterministic relationship between household debt and disposable income, net wealth and inflation. No significant short-run relationship exists between debt and the interest rate variable. There is further evidence of the existence of a long-run relationship between household debt and disposable income, interest rate and inflation. The implication of the study is that the low interest rates during the period (2004-2011) and a general increase in household income have supported household consumption expenditure in South Africa thereby sustaining high household indebtedness.