December 2002 - Article - Household debt wealth and saving
J W Prinsloo
Last Modified Date:
2020-10-01, 09:30 PM
Quarterly Bulletins > Articles and Notes
Household debt ratios are important analytical tools because they allow policy makers, analysts, economic researchers and others to evaluate households’ financial situation and to forecast final consumption expenditure. Households’ consumption expenditure currently represents more than 60 per cent of South Africa’s gross domestic product. Consequently, fluctuations in households’ expenditure patterns affect the economy’s output performance. Rising levels of consumption expenditure by households generally stimulate the economy, whereas slower growth or declines in aggregate consumption expenditure by households have a dampening effect on economic growth. In general, the spending and saving behaviour of individuals is determined by various factors such as their material and social needs, tradition, standard of living, existing indebtedness, net worth and disposable income. Consumption expenditure by households is therefore determined to an important degree by the extent of and the actual and anticipated changes in the income of consumers, as well as their ability to spend future income now by making use of credit. Credit extension is also an important link in the transmission mechanism that relays changes in monetary policy to changes in the total demand for goods and services and the rate of inflation. A change in interest rates by the monetary authority could have an effect on credit extended to households, and this would ultimately influence aggregate demand. The availability of credit from reliable financial institutions could help channel resources into their most productive uses and so increase economic growth and prosperity. In addition, greater access to credit makes it easier for business enterprises to initiate new capital formation projects, augment stock levels and expand their activities. The availability of credit also makes it easier for households to spend. An increase in credit could entice consumers to buy now instead of postponing buying for the future. Therefore, it is important to measure household debt appropriately in order to evaluate consumer spending behaviour. The purpose of this article is to analyse household debt and other relevant aspects, particularly those related to wealth and saving. Consequently, the objective of the first section is to define household debt. The section after that reviews the structural developments in household debt with specific emphasis on the relative importance and composition of household debt. This is followed by an analysis of the household sector’s indebtedness. Further sections discuss household debt relative to real and financial assets, and an analysis of household debt and its relationship to wealth and saving. The last section encompasses a summary and concluding remarks.