The impact of credit and debt shocks on household consumption in South Africa

This study investigates the dynamic relationship between credit supply and demand shocks and household consumption in South Africa using a quantile autoregressive distributed lag (QARDL) model. Motivated by the increasing reliance of South African households on debt amid stagnant income growth, rising living costs, and persistent unemployment, the research aims to understand how credit market conditions influence consumption across different segments of the income distribution. Drawing on data spanning from 1970 to 2024, the study incorporates key macroeconomic variables including real GDP per capita, household income per capita, household debt as a percentage of GDP, the credit-to-GDP ratio, inflation, interest rates, and the unemployment rate. The QARDL framework allows for the estimation of both short-run and long-run relationships while accounting for heterogeneity across consumption quantiles. The results indicate that household consumption is more responsive to income shocks and credit availability in the lower and middle quantiles, suggesting heightened sensitivity among poorer households. Credit supply, proxied by the credit-to-GDP ratio, exhibits weak but positive short-run effects, while household debt consistently exerts a negative influence on consumption across all quantiles and time horizons, with stronger effects in lower quantiles. These findings highlight the consumption-depressing effects of excessive debt, especially for financially vulnerable households. Moreover, macroeconomic stability indicators such as inflation and interest rates are found to negatively affect consumption, particularly in lower quantiles, underscoring the uneven transmission of monetary policy. The empirical results support the hypothesis that household debt contributes to financial fragility and undermines consumption over time, while credit supply shocks play a more modest role. The study concludes that policies aimed at improving income stability, managing household debt levels, and enhancing financial inclusion—particularly for low-income groups—are essential for sustaining household consumption and promoting inclusive economic growth in South Africa.