Macrofinancial linkages and income distribution in the South African economy

This study examines the impact of financial factors and income distribution on aggregate demand and growth in South Africa, using data spanning 1980–2019. We applied the autoregressive-distributed-lag bounds-testing procedure to uncover the effects over the short-and-long-run horizons. Additionally, we estimated impulse response functions to reveal further dynamic interactions. Our findings indicate that the key financial factors affecting the South African real economy are credit growth, interest rates, house prices and exchange rates. House prices play an important role, via the collateral channel, in driving consumption demand. Meanwhile, credit growth stifles investment demand in the long run. Interest rates constrain demand and growth, while the strengthening of exchange rates improves investment for firms. However, exchange rates impact negatively on GDP, presumably, through the trade-channel. We also found that income inequality suppresses consumption and investment demand, as well as GDP. This suppression appeared to be relatively pronounced in the short run for investment and growth, while for consumption, the suppressive impact was persistent. Therefore, we recommend that any policy framework aiming to galvanise growth should not overlook the problem of inequality. Otherwise, any headway made on growth will be back-pedalled by the demand-reducing impact of high-income inequality.