Alarm bells for South Africa’s economy

The Reserve Bank has cut its economic growth forecast for South Africa from 1.7% for the year to 1.2% due to the impact of sharp changes in US trade policy and limited progress in structural reforms. 

This was revaeled in the bank’s Monetary Policy Committee (MPC) statement on 29 May, in which a 25 basis point cut was announced. 

As a result, the repo rate will come down to 7.25% amid lower inflation, with readings indicating slower-than-expected price increases. 

While this is good news for consumers and the economy, the Reserve Bank warned that economic growth is likely to disappoint expectations from the beginning of the year. 

Governor Lesetja Kganyago said that since the last MPC meeting in March, the global economy has been roiled by uncertainty and volatility. 

Higher tariffs on imports into the United States have been announced and then partly reversed and delayed, creating immense volatility in financial markets. 

This was one of the key reasons why the Reserve Bank has hesitated in cutting rates further, despite inflation remaining low in South Africa. 

US-based assets have sold off, while alternative safe havens, such as gold and the euro, have performed well. 

The Reserve Bank expects the combination of higher trade barriers and elevated uncertainty to weaken the global economy, pushing it to lower its projections for global growth. 

This is one of the major headwinds for South African economic growth, with the country’s small and highly open economy vulnerable to external shocks. 

While the official data for economic growth in the first quarter is yet to be released, the bank said that initial data for sectors like mining and manufacturing have been disappointing. 

Unemployment has also risen, indicating the economy is relatively stagnant, if not shrinking. 

In its last meeting, the MPC warned of downside risks to our growth forecast, with it now officially trimming its GDP projections. It currently expects growth of 1.2% this year, rising to 1.8% by 2027. 

The outlook for structural reforms remains positive, but there are also headwinds like lower global growth, the MPC said. 

South Africa’s economy under pressure

The Reserve Bank’s revision of its forecasted economic growth for South Africa comes one week after the National Treasury slashed its own estimates. 

In his Budget Speech, Finance Minister Enoch Godongwana revealed that the Treasury has cut its economic growth projections for 2025 from 1.9% to 1.4%. 

This has serious implications for the country’s finances, with the forecasted economic growth being used to project tax revenue for the coming fiscal years. 

As a result of this revision and the reversal of the planned VAT hike, the Treasury expects to collect R61.9 billion less in tax revenue over the next three years compared to March estimates. 

Godongwana explained in his presentation that South Africa, as a small, open economy, is dependent on global trade and financial inflows.

He said this makes the country particularly exposed to global economic developments, including the heightened trade tensions and lower global economic growth projections seen so far this year.

Godongwana said the global economy is facing heightened trade tensions and elevated policy uncertainty with worrying economic consequences.

The International Monetary Fund now projects global growth at 2.8 % in 2025. This is 0.5 percentage points lower than its January estimate.

The National Treasury’s adjustment to economic growth for 2025 is expected to result in the country’s GDP being R127.2 billion lower than initially predicted. 

“As global growth has faltered, South Africa’s economic outlook has also weakened, with GDP expected to grow by only 1.4% in 2025,” he said.

“Since the 2025 Budget Review publication in March, greater uncertainty and trade fragmentation have contributed to a weaker economic outlook.”

South Africa’s GDP is now forecast to grow at an average of 1.6% between 2025 and 2027, significantly lower than the 1.8% forecast two months ago.