Brighter 2025 outlook for South Africa’s economy

South Africa’s economy is expected to improve over the next five years as the government of national unity (GNU) continues implementing reforms, particularly in Eskom and Transnet.

But there are some global headwinds, not least the United States’ re-election of Donald Trump and his threats of import tariff hikes, the continued slow-down of China’s economy and the climate crisis.

So said Standard Bank chief economist Goolam Ballim, who presented the bank’s forecast for the economy and Sub-Saharan Africa for 2025 at a media event in Johannesburg.

Ballim said the bank anticipated 2025 would be “ more promising than the stabilisation period of 2024”, during which there had been a “striking improvement” in the political climate since the 29 May elections which saw the formation of the government of national unity. State-owned enterprises had also improved.

“Over the past 10 years or so, there has been an overarching sense of decay regarding sentiment associated with South Africa’s political climate. The [political] rule may be considered ‘the everything’, an all-encompassing economic growth tonic, which reveals its credentials when the guardrails of society are collapsing,” he said.

Ballim said the path of the country’s GDP tends to follow a trajectory mirroring the political climate.

It was encouraging that there had been a surge in optimism after the establishment of the 10-party coalition government. President Cyril Ramaphosa and Democratic Alliance leader John Steenhuisen had signalled an “almost unbridled will” to consolidate the GNU, Ballim added.

“It is natural there is going to be ideological conflict among the various parties, but we are in a far more evolved era than four years ago. Both in terms of key personnel and in execution machinery,” he said.  

He said the South African Communist Party and labour federation Cosatu had been unable to retard the president’s reform commitment.  

Ballim contrasted the current period with the “Ramaphoria” of 2018, when bond yields improved before relapsing to previous under-performance levels.

“This time it is different. Yields have improved and are holding steady,” he said.

Ballim added that the JSE had also re-rated in recent months, leading to elevated stock prices because of positive sentiment — although there has not been a measurable improvement in corporate earnings nor any discernible improvement in efficiency in the country.

Positive prospects for the country are being underpinned by the durability of the coalition government and its strong foundational principles that have so far managed friction, as well as its constructive cabinet and ministerial actions, he added.

Macro-economic tailwinds have included the stabilisation of energy supply and the early reform taking place at Transnet. They have also included fiscal stabilisation, inflation easing below the South African Reserve Bank’s 3% to 6% target range, interest rate cuts, accelerated real wage growth and the embrace of the private sector.

Ballim said the country could be on a journey to 3.5% growth if it continues on the current trajectory over the next five years.

“We believe the repair of the electricity infrastructure is the most significant stand-alone tonic that could buttress economic growth. Improved logistics over the next two years will be another leap [as well as several] other economic reforms, and if we are able to deal with crime, the 3.5% trend growth over a five year horizon becomes probable,” he said.

He said for every 1% increase in GDP, employment rises by nearly 0.7%, which is more than double the global average.

“At a steady state of 3% GDP growth, SA could generate approximately 350 000 formal sector jobs per annum. These 350 000 jobs would buoy the welfare of about 1.2 million near-dependents,” Ballim said.

“Over a five-year envelope sustained 3% GDP growth would lift the welfare of almost eight million South Africans primarily through the labour market. This excludes the additional welfare advances through fiscal expenditure, for example on municipal services, social spending, education and health.”

He added that the sub-Saraharan Africa region should muster real weighted GDP growth of about 4.5%, although bigger economies would underperform, while small and medium sized economies would primarily drive the expansion.

South Africa could achieve a maximum of 2% GDP growth , while Angola and Nigeria would straddle 3.5% to 4% growth.

Ballim said smaller economies would achieve astonishing levels of outperformance in regions, particularly in East Africa where countries were achieving growth of 4% to 6.99%.

But, he added, the climate crisis posed a major risk factor for the region, as well as global fragmentation and politics, supply chain issues and the slow-down in China’s economy.

KPMG South Africa has forecast economic growth of 1.5% for South Africa in 2025 and 1.8% in 2026 in its latest economic update report.

“The inflation rate is expected to end 2024 well below target and remain there through 2025. Consequently, interest rates are set to continue to decline, which will subsequently provide breathing room for consumers and businesses alike,” the audit firm said.

“The unemployment rate is still a concern and is expected to decrease slightly from the current 33% over the same period.”

The positive sentiment after the general elections, the improved performance of electricity supply and a slowdown in inflation “underpinned the more optimistic view of the economy over the forecast period”, KPMG lead economist Frank Blackmore said.

In the first half of 2024, the economy grew by an average 0.2%, limited by elevated inflation and interest rates, which suppressed private consumption and business expenditure, augmented by ongoing interruptions in power supply in the first quarter of the year. 

GDP contracted by 0.3% in the third quarter on the back of a large contraction in agricultural production, while many other sectors grew only marginally as a result of logistics bottlenecks and weak demand abroad, reducing the growth forecast.

“The expectation, however, is for stronger economic growth over the final quarter of the year on the back of the improved macroeconomic environment,” Blackmore said.

KPMG expects this positive momentum to continue into 2025 and 2026 with GDP growth forecast to improve to an average of 1.7%  as experienced over the 10 years leading up to the Covid-19 pandemic.

“However, this is still below what is required to make a meaningful impact on economic inclusion to absorb a significant proportion of the unemployed into the labour market,” Blackmore said.

“Consequently, unemployment is expected to still be elevated with only slight improvements over the forecast period due to the upwardly adjusted economic growth expectation.”

Inflation slowed to 2.8% in October 2024 from 5.3% at the start of the year, reaching its lowest level since February 2021. It ticked up only slightly to 2.9% in November.

“This reduction in the rate of inflation is the primary reason behind the central bank commencing its interest rate reduction cycle. The positive effect of a reduction in interest rates of households and businesses should lead to an increase in both consumption and investment spending,” Blackmore said.

“The largest contributors to the inflation rate remain housing and utilities (electricity and water) followed by certain food and non-alcoholic beverages and financial and insurance services. The monetary policy is expected to loosen further in 2025 as inflation remains below the target rate.”