Analysis of South African Household Consumption Expenditure and its Determinants: Application of the ARDL Model

Aggregate consumption expenditure is considered to be a major variable in determining a country’s growth, and is mostly used in forecasting the economic prospects of a country. Thus, understanding of a country’s consumption behaviour plays a central role in macroeconomic analysis. The aim of this paper is to conduct an econometric analysis of the key macroeconomic determinants of consumption expenditure in South Africa from 1995 to 2015. The autoregressive distributed lag (ARDL) model was utilised to analyse short- and long-run relationships between real aggregate private consumption and selected macroeconomic variables. The sample period consists of quarterly time series from 1995 quarter 1 to the last quarter of 2015. Long-run results revealed that South African households consume a large portion of their real income and that real consumption increases with the appreciation of the domestic currency (rand). Additionally, price levels and interest rates were found to have a negative effect on real consumption expenditure in the long run. In the short run, price levels and interest rates were found to have negative effects on real consumption expenditure in South Africa, while the effect of real exchange rates were not statistically significant. Findings of this study suggest that macroeconomic stability factors play a crucial role in determining real consumption in the South African economy.