Output Growth and Inflation Responses to Single and Double Credit Growth Threshold Effects in South Africa

Do the double thresholds exert asymmetric effects on GDP growth, inflation and household consumption growth? We establish that lower and upper threshold levels for aggregate credit growth, sectorial credit growth and mortgage credit growth occur around 9.2 per cent and 12.7 per cent, respectively. We use these thresholds to classify credit growth regimes as (i) sub-par or moderate credit growth, to capture responses when credit growth is below the lower credit threshold, (ii) normal credit growth, when credit growth is at or above the lower credit threshold, and (iii) high credit growth, for responses when credit growth is above the upper credit threshold. We find that there are significant differences in the GDP growth, inflation and household consumption growth below the lower threshold and above the upper threshold. GDP growth increases more due to credit growth shocks when there are no credit growth regimes and when aggregate credit growth is above 9.5 per cent and 12.7 per cent compared to when credit growth is below 9.5 per cent. But the GDP growth slowdown is shallower and recovers faster in the low credit growth regime. The GDP growth downturns associated with credit growth in the high credit growth regimes are more severe and take longer to recover. Similarly, inflation peaks at more than double and is more persistent when credit growth is above 9.5 per cent and 12.7 per cent compared to the low credit growth regime. The policy implication is that additional credit growth above the normal and high credit growth regimes does not necessarily result in accelerated and incremental GDP growth and household consumption growth, but rather induces higher inflation responses. This means that credit growth above the normal credit growth regime results in higher inflationary pressures. Credit growth below the normal credit growth helps to contain inflationary pressures and is consistent with the price and financial stability mandates to the degree that excessive credit and debt-driven household consumption growth is contained.