Dark clouds gather for South Africa’s economy

South Africa’s policy uncertainty reached a record high in the first three months of 2025, as several negative global and local factors weigh on the country’s outlook.

NWU Business School Professor Raymond Parsons said public and private sector strategies are needed to reverse this worsening trend and achieve strong economic growth.

NWU Business School released its Policy Uncertainty Index (PUI) every quarter since it was launched in early 2016.

This index shows the net outcome of positive and negative factors influencing the calibration of policy uncertainty in South Africa over the relevant period.

Policy uncertainty is a crucial measure of investor confidence and a strong indicator of a country’s economic growth levels.

As largely expected, the PUI rose much further into negative territory in the first quarter of this year – to 78.6 from 65.7 in the fourth quarter of 2024. The index’s baseline is 50.

Parsons highlighted that this is a record high for the PUI, explaining that persistent negative factors simply continue to outweigh the positives.

“The first quarter 2025 PUI inevitably reflected a sharp rise in policy uncertainty for external and internal reasons, but which in time is reversible if the right actions are taken,” he said. 

“Both government policy and business strategies will need to be adapted to a new range of risks, as well as exploiting new or alternative economic opportunities.” 

“It will also be a strong test of the further collaboration still needed between the Government of National Unity (GNU) and the private sector to meet these policy challenges.”

Parsons explained that the GNU has an overall economic growth target of 3% for South Africa, and accelerated structural reforms remain the best pathway to this goal.

“A strategic pivot in growth policy is also needed to create the extra economic buffers and resilience needed to deal with external shocks,” he said. 

“High investment and job-rich growth require confidence in the future. South Africa’s economic steersmanship must, therefore, see that it stays on the right track in ways that ensure that tailwinds outweigh headwinds in 2025.”

Six factors weighing on South Africa

Parsons explained that there were several factors working in South Africa’s favour in the first three months of this year.

For example, interest rates have come down over the past few months, with the latest cut made in January.

In addition, inflation remains low, unemployment has improved, household spending remains strong, and several key local industries anticipate a good year.

However, six key sources of heightened policy uncertainty in the past quarter outweighed these positives and saw the PUI reach a record high.

These six factors are outlined below.

1. United States policies

Firstly, US President Donald Trump’s foreign and tariff policies have injected a powerful and pervasive element of uncertainty and unpredictability into the world economy. 

“Tariff uncertainty can be as economically damaging as tariffs themselves,” Parsons explained. 

“There is also the growing concern that the potential inflationary risks arising from the US overall economic agenda may ultimately slow the pace of interest rate easing globally, as well as in South Africa.”

2. United States diplomatic tensions

Secondly, the sudden expulsion of South Africa’s Ambassador to the US, Ebrahim Rasool, from the US in mid-March was another shock to the country’s efforts to recalibrate and stabilise its diplomatic relations with the US. 

“Given the existing mutual stake in SA-US trade and investment relations, exacerbated political tensions therefore inevitably also mean increased uncertainty as to the potential economic and business fallout,” the professor explained. 

“The future of AGOA in general, and South Africa’s participation in particular, are also now at greater risk.”

3. Eskom and load-shedding

While load-shedding has largely been kept at bay over the past year, there have now been four Eskom load-shedding events in the first quarter of 2025.

“Although minimal, they are reminders of the continued vulnerability of the energy supply in the economy,” Parsons said.

4. Growth-unfriendly Budget concerns

Parsons explained that many stakeholders were disappointed that the revised 2025 Budget did not convey a more urgent ‘growth-friendly’ message.

He said it also remains uncertain what any rise in the overall tax burden will mean for consumer spending, which is currently a key driver of South Africa’s emerging economic recovery. 

South Africa’s consumer confidence also dropped significantly in the first quarter of 2025, another sign of the significant amount of pressure local consumers are under.

5. More Budget uncertainty

“There are also the current extended doubts surrounding the amended National Budget presented to Parliament by Finance Minister Godongwana on 12 March,” Parsons said. 

“The growth assumptions underpinning the Budget – and upon which revenue forecasts greatly depend – may now be too optimistic.” 

He said future risks to fiscal policy remain, and the Budget has failed to guarantee a majority vote to eventually be passed by Parliament. 

“The Budget process has become highly politicised. The GNU and Parliament collectively must now soon find ‘sufficient consensus’ on credible fiscal outcomes that will promote fiscal sustainability and economic growth,” he said. 

“It puts a heavy responsibility on the shoulders of all Parliamentarians ‘to up their game’.”

6. Fixed investment challenges

The recent Nedbank Capital Expenditure Project Listing for 2024 highlighted the hesitancy around trends in private fixed investment.

The data showed the sharpest rise in total fixed investment plans since 2021, but the government has now replaced the private sector as the major driver. 

“The private sector revealed investment plans amounting to a decline of 4.3% in 2024, compared with 2023,” Parsons explained. 

In addition, risks to better overall investment plans are tilted to the downside and will depend on the public sector’s ability to follow through on its plans and move more decisively towards lifting the constraints on economic growth and job creation.