South Africa’s economy experienced low growth over the past decade. One of the leading causes of low levels of economic growth is a lack of robust consumer spending. In macroeconomic terminology, consumer spending is one of the components of aggregate demand-side models.

As the Keynesian model implies, other components of aggregate demand include government spending, domestic investment and net exports. All these components together equal a country’s total gross domestic product or GDP. Consumer spending is by far the most significant contributor of all the GDP components. In most countries, its contributions to GDP are from 55-70%.

If consumer spending is low and declining, economic growth declines. A country with stagnating consumer spending is China. For more than two decades, China had extremely high levels of economic growth, but since Covid-19 its economic growth environment has been disrupted. Its exports came under pressure from lower global demand and supply chain problems.

China’s high levels of growth were to a large extent based on international trade. However, with the decline in exports and relatively weak local demand and consumer spending, its economy is going through a period of significantly lower growth.

Table 2 below represents a summary of consumer spending in South Africa over the past 20 years. First, the contribution of consumer spending to overall GDP increased steadily from 1995 to 2023. The initial contribution to GDP was relatively low at below 60%, but this figure increased to 66.6% in the 2019 to 2023 analysis period. By comparison, the US has a consumer spending contribution of 67.5% to GDP.

More global comparisons include Qatar, the lowest, at 19.45%, China at 37%, India at 60.6%, Brazil at 63.1% and Lesotho, the highest at 90.7%. The increase in consumer spending means that the other components of aggregate demand, such as government spending, investment and net exports, contribute less to GDP.

If government spending diminishes, especially a disjointed government such as in South Africa, this could have a positive impact on growth. On the other hand, if the government had effective plans and strategies in place, government spending could stimulate growth, especially when invested in infrastructure.

However, less is more in the case of SA’s government. In 2023, the contribution of government spending to GDP was about 19.9%, while domestic investment, a significant driver of economic growth, was only 14.8%. The contribution of domestic investment needs to increase to at least 25% to 30% of GDP, with government spending much lower at closer to 15%. An ideal distribution between the components of aggregate demand is proposed in Table 1.

The comparison between growth in consumer spending and GDP growth reveals some fascinating results. For all periods analysed, the growth in consumer spending was higher than GDP. However, a problem with both variables is that the growth rates for consumption and GDP diminish rapidly over time.

Both growth rates were below 1% for the period 2019 to 2023. South Africa urgently needs growth rates above at least 3%. Higher growth rates are required to create jobs and alleviate poverty.

Higher levels of consumer spending are critical for economic growth as spending stimulates demand for goods and services, leading to increased production. Higher production levels boost business development, and investment, and create job opportunities. In return, more employed people allow for a greater domestic market, which leads to more opportunities.

This cycle of wealth needs to be fostered for high levels of economic growth. More spending and production with higher levels of growth also lead to increased tax revenue for the government to expand infrastructure and repay debt. A well-developed private household spending component is critical for a healthy economy.

Low growth in consumer spending has the opposite effect and leads to low growth and a vicious cycle of unemployment and other social problems such as poverty. The main problem with household consumption in SA is that about 50% of households live in poverty with limited income. Unemployment is at 47.8% (expanded definition), indicating that the consumer market is only just over half the size it should be.

SA’s middle-income group, which is essential from a demand-side economic perspective, is relatively small and declining. As much as 60% of the salaries of these about four million households are allocated to servicing debt and repayments.

What could stimulate consumer spending, leading to sustainable and balanced economic growth?

• Fiscal policy: The basic principle of putting more money into consumers’ pockets is applicable. The government, however, has little space to move using tools such as tax cuts due to the pressure on income and expenditure. Cash transfers to the about 18 million social welfare Sassa beneficiaries already seem to be unsustainable.
• Monetary policy: South Africa is at the peak of the interest rate hike cycle, and the next move by the SA Reserve Bank should be to lower interest rates. This will boost consumer spending. Over the past 10 years, economic growth has been low, within the 3% to 6% inflation target. It could be asked whether the mid-point of 4.5% is not too low for economic growth. During the current rate hike cycle, the SA Reserve Bank even increased interest rates when consumer spending and GDP had very low or even negative growth rates.
• Support diversification and increased exports, backed by improved supply chain systems.
• Support business development: Small business development policy implementation could include tax breaks, lower interest rate loans and training potential entrepreneurs.
• Private sector domestic investment: This could be stimulated via policy certainty. Most sectors of the economy are negatively affected by policy uncertainty; for example, the land reform process affecting the agricultural sector. National economic development needs to be simplified and implemented.
• Infrastructure development: Infrastructure has not been maintained and expanded for three decades. This is urgently required to stimulate the economy and create jobs.
• Opportunities for young people to obtain practical skills and to enter the labour market.

An integrated development strategy is required to stimulate economic growth and development. Focusing on a single section or sector of the economy will not lead to success.

The private sector should be allowed to create employment via an enabling environment. Labour legislation restricts job creation and this affects the health of consumer spending. DM