South Africa’s weak link

South Africa has made significant strides in its economic recovery thus far, but will need to meaningfully increase fixed capital formation to achieve the government’s 3% GDP growth target.

This will entail attracting substantial investment from the private sector through favourable policy responses and growth-friendly policies.

NWU Business School economist Professor Raymond Parsons explained that South Africa will need to significantly increase fixed capital formation in the country to achieve meaningful growth.

Parsons’ comments come after the release of South Africa’s third-quarter GDP growth statistics, which showed that the local economy grew by 0.5%.

“It is welcome news that in the third quarter of 2025, the economy showed its fourth consecutive rise in economic activity, albeit off a low base,” Parsons said.

“This expected better growth trend confirms that a modest economic recovery is indeed underway, driven by a combination of well-known favourable developments.”

This growth was driven, in part, by a 1.6% rise in fixed capital formation, which increased after three quarters of contraction.

Parsons said growing fixed capital formation is critical to achieving sustained job-rich growth in South Africa.

He added that, while the 1.6% increase in the third quarter is positive, it still leaves fixed capital investment at about 14% of South Africa’s GDP.

He explained that to achieve the Government of National Unity’s 3% growth target in the medium term, this figure would need to rise closer to 20% of GDP.

For context, in healthy and developed economies like the United States, fixed investment would usually make up around 25% of GDP.

South Africa’s fixed investment rate has declined substantially over the past decade, when it stood at around 24% of GDP.

Over this period, there was steady growth across all of the country’s economic sectors, but the private sector accounted for almost 16% of the total.

However, since this peak, there has been a steady decline in private sector investment in South Africa, with it slowing to below 10%.

South Africa’s strained fiscus, while improving, leaves the state with limited funds and capacity to meaningfully increase its contribution, meaning the country will need to rely on the private sector to grow fixed investment.

The graphs below, courtesy of Stats SA, shows South Africa’s fixed capital formation (GFCF) growth rate from 2023 to now, and the contributions to GFCF growth in the third quarter of 2025, respectively.

Private sector to the rescue

Citadel chief economist Maarten Ackerman said the growth in fixed investment recorded in the third quarter of 2025 is possibly the most positive takeaway from the quarter.

“It may signal that private sector investment is beginning to return and that structural reform is taking hold,” Ackerman said, calling it a “turning point” for investment activity.

“With South Africa’s investment ratio at 14% of GDP, compared to 24% a decade ago, sustained improvement in this area remains essential for long-term economic progress.”

To increase fixed investment further, Parsons said the government will need to attract the private sector with growth-friendly policies.

“In the coming year, a sufficient number of firms must therefore continue to feel that growth prospects justify their making fresh plans for expansion,” he said. 

“The green shoots of the current economic recovery and investor confidence must still be nurtured by favourable policy responses.”

“The challenge remains to implement robust growth-friendly policies that will further build on the steadier foundation of the incipient economic upturn that has become apparent in 2025.”

Ackerman said that if policy reform continues and fixed capital investment gains momentum, South Africa could sustainably lift its growth above current levels.

Luckily, the private sector’s current hesitance to invest in the economy is not due to a lack of funds, with corporates holding an estimated R1.8 trillion on the sidelines.

Rather, their reluctance stems from a lack of confidence in the local economy and onerous regulations that discourage long-term investment.

If the government can implement growth- and business-friendly policies and deregulate key industries, the private sector can substantially boost fixed investment and, in turn, South Africa’s economic growth.