Bad news about South Africa’s economy

FNB has adjusted its expectations for South Africa’s GDP growth over the next three years, as 2025 is shaping up to be a year full of challenges for the local economy.

FNB economists Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano said in the bank’s latest Economics Weekly that they have made modest adjustments to their macroeconomic projections.

This comes after the release of the South African Reserve Bank’s (SARB) quarterly bulletin for the fourth quarter of 2024. 

The economists explained that their updated forecasts incorporate several key factors that have come up over the past few months.

This includes the anticipated impact of the National Treasury’s proposed value-added tax (VAT) increase, with South Africa’s VAT rate set to rise by half a percentage point in 2025 and another half a percentage point in 2026.

The economists also considered the impact of a fiscal drag and the associated decline in consumer confidence. 

In addition, they assessed the implications of ongoing United States trade policy recalibration and South Africa’s potential exclusion from the African Growth and Opportunity Act (AGOA).

This comes after United States President Donald Trump announced wide-ranging tariffs on the world economy, including South Africa.

Trump’s tariffs were more wide-ranging than initially expected and more severe in specific cases, with South Africa being hit with 30% tariffs on local goods exported to the US. 

Late on Wednesday, 2 April 2025, Trump announced a global 10% tariff on all imports and higher rates for the ‘worst offenders’, including South Africa.

Trump said this is all part of his plan to balance trade and put America first, claiming that countries were exploiting trade with the United States.

“We estimate a potential drag on real GDP growth ranging from 0.1 percentage points to 0.4 percentage points,” the economists said.

Local challenges

Regarding local political dynamics, FNB’s economists said they do not foresee changes in the political landscape that would alter their baseline view on economic reforms. 

“However, the situation remains complex, and the probability of an accelerated reform scenario remains low,” they said.

“While we remain cautiously optimistic about the economy’s recovery, we have revised our real GDP growth projections slightly downward.” 

“This reflects a weaker external environment, increased household tax burdens, and subdued consumer sentiment.” 

Even positive developments, like the anticipated rebound in fixed investment following a 3.7% contraction last year, are expected to be constrained by continued policy uncertainty.

Therefore, the economists revised their real GDP growth expectations down by 0.1 percentage points, with projected growth now at 1.6% for 2025, 1.7% for 2026, and 2.0% for 2027.

The economists also adjusted their inflation expectations for 2025 downward to 3.8% from 4.0%, reflecting subdued inflationary pressures.

They said the VAT increase is estimated to contribute approximately 0.1 percentage point to inflation. Over the 2025 to 2027 forecast period, inflation is expected to average 4.4%.

Positively, the economists said this more moderate inflation outlook will create some scope for the SARB to extend the interest rate cutting cycle by a further 50 basis points cumulatively before year-end. 

“However, global headwinds and the related volatility remain a risk to the broader monetary policy outlook,” they warned.

The economists said the consumer sector is expected to be a key driver of economic growth recovery over the next few years, even though it has been below 1.0% over the past two years.

“A strong performance in new passenger vehicle sales has been buoyed by interest rate cuts and the gradual replenishment of household balance sheets,” they said. 

“However, the VAT increase, effective 1 May 2025, is expected to weigh on consumption, along with the impact of bracket creep.” 

“As a result, we have revised our household consumption growth forecast downward by 0.2 percentage points, with growth now projected at 2.0% for 2025 and remaining at this level through 2027.”

The economists warned that the US-imposed 30% tariff on South African exports and the potential exclusion from AGOA add significant uncertainty to the country’s trade outlook. 

“The impact on South African exports will depend on factors such as the price elasticity of demand, whether South African exports can still compete in the US market, and the extent to which exporters can divert goods to alternative markets,” they said. 

“However, while export market diversification is critical, the US remains South Africa’s second-largest trading partner after China, underscoring the importance of maintaining strong bilateral trade relations.” 

In 2024, South Africa exported goods worth R156.9 billion to the US, including precious metals, transport equipment, iron and steel products, mineral resources, and agricultural commodities.

Given this, they said fostering better trade relations with the US is crucial for sustaining economic growth. 

“Overall, while South Africa’s economic recovery unfolds, risks from both domestic and external factors necessitate cautious optimism,” they said. 

“The adjustments to our macroeconomic projections reflect evolving fiscal policies, global trade uncertainties, and the complex political landscape.” 

“Continued vigilance will be required to navigate these challenges effectively.”