Abstract
The South African economy is characterised by low levels of household savings which play a very crucial role in stimulating sustained economic growth. At the same time consumers borrow in order to consume. The paper intends to investigate the impact of household savings and financing on economic growth in South Africa. The study is envisaged to assist monetary authorities and policy makers to mitigate this problem. An annual time series data covering the period from 1980 to 2014 is analysed by means of the Vector Error Correction Model approach. The Johansen Cointegration test results confirmed the existence of a long run relationship amongst variables under investigations. Moreover, the results suggest that financing, namely; credit extensions and leasing finance have positive relationships with the country’s economic growth while household savings indicate a negative relationship with growth. That being the case, the recommendation is that since it has been established by other studies that a rapid increase in credit is not commonly perceived to be one of the leading indicators of financial instability, policymakers are advised to consider imposing stringent credit control measures so that the demand for financing can be kept under control.
Highlights
Business and Economic HorizonsHouseholds are the backbone of any economy
The aim of the study was to analyse the relationship between household savings, credit extension and economic growth in South Africa
The Augmented Dickey-Fuller (ADF) unit root test indicated that all variables are stationery at first difference and are integrated of order one
Summary
Households are the backbone of any economy. This is not different in South Africa because their consumption account for about 60% of the gross domestic product (GDP) (World Bank, 2016). According to Amusa (2014), for a country like South Africa, where the level of domestic saving is low, the question of the role of household or domestic savings in economic growth becomes critical. At the same time the development of leasing should be achieved by carrying out interventions on the suppliers of leasing in order to provide a favourable environment for leasing provision and to stimulate demand for the financial product This conforms to the supply-leading hypothesis, which suggests that financial development stimulate economic growth (Aloysius & Lubinda, 2013). There is a need to investigate the impact of household savings and financing on economic growth in order to assist monetary authorities to come up with suitable policies to mitigate problem.
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