South Africa its own worst enemy

Despite several positive developments over recent months, policy uncertainty in South Africa remains high, as economic growth continues to struggle.

North-West University’s (NWU) Business School recently released its Policy Uncertainty Index (PUI) for the second quarter of 2025, which showed a decline to 75.9. 

With this index, any figure above 50 reflects greater policy uncertainty, while an outcome below 49 reflects less policy uncertainty.

Therefore, while the second quarter’s 75.9 is a significant improvement compared to the record high of 78.6 recorded in the first quarter, the PUI remains well in negative territory.

Despite this, the PUI report highlighted several positive developments for South Africa in the second quarter of 2025.

The country’s inflation is now generally expected to remain well-anchored within the Reserve Bank’s inflation target range of 3% to 6%. 

Therefore, at its May meeting, the Reserve Bank’s Monetary Policy Committee voted to resume its interest rate-easing cycle by reducing borrowing costs by another 25 basis points. 

“If the inflation outlook remains stabilised, another cut in rates could be expected in the next few months, as in any case South Africa’s monetary policy is still in restrictive territory,” the report said. 

Another factor counting in South Africa’s favour is the strong gold price, particularly during these times of heightened uncertainty, which normally spells good news for the safe haven asset. 

A World Gold Council survey indicated that central banks expect their gold holdings as a proportion of their reserves to increase over the next five years, while expecting their dollar reserves to be lower. 

Another positive factor has been the recent announcement by the Financial Action Task Force (FATF) that South Africa is ‘substantially’ completing all 22 items on the action list.

This opens the way for the country to eventually be taken off the ‘grey list’ by the end of 2025. This is subject to an on-site visit by the FAFT, probably in October. 

The second quarter of 2025 was also free of Eskom load-shedding. “If electricity supply is seen to remain secure, this is a positive development for business confidence and the economy,” the PUI report said. 

Another metric with better news has been South Africa’s rental market, which has been showing signs of sustained recovery, with rental growth at a seven-year high.

The PUI report said the single most positive development in Q2 2025 was the finalisation and Parliamentary endorsement of the Treasury’s third Budget. 

Three big challenges

Alongside these positive developments, the PUI report highlighted three groups of factors that appear to have kept the index in negative territory.

Firstly, the report explained that diverse high frequency data – ranging from manufacturing performance (down) to retail sales (up) – continue to send out mixed signals. 

“Economic recovery has been slow and uneven. The economy as a whole is struggling to show strong momentum,” the report explained. 

For example, although agriculture experienced a bumper performance in the first quarter of 2025, confidence across the agriculture sector eased slightly in the second quarter.

“While the underlying forces in the agricultural sector remain strong, it nonetheless demonstrates an immediate vulnerability to an uncertain trade environment,” the report said.

Secondly, South Africa’s disappointing GDP growth figure of 0.1% in the first quarter of 2025 came as no surprise.

“This reality had already been presaged by several reduced growth forecasts for 2025, including by the National Treasury (1.9% to 1.4%) and the SARB (1.7% to 1.2%),” the report said. 

“If present trends persist, the growth outlook is likely to be only about 1% for 2025, possibly rising to about 1.5% in 2026.” 

The report added that unemployment also continues to be too high because economic growth is too low.

Lastly, the PUI report explained that although household spending remains strong enough to support economic activity, the 1Q 2025 GDP figures show that total fixed capital investment is presently negative. 

“The poor performance of gross fixed capital raises a notable red flag, as capital investment is the kingpin of the growth rate,” the report said. 

“It highlights the importance of accelerating the large-scale infrastructural spending to which official policy is already committed, especially through public-private sector partnerships.”

Several experts have warned about this factor over recent months. The Q2 2025 FNB/BER Civil Confidence Index showed that many civil contractors are concerned about the outlook for the country’s construction sector, as very few new projects are being started.

Overall, the PUI report said South Africa’s economic recovery is battling to gain traction and therefore needs maximum support to underpin the business cycle upturn.

“A strategic pivot in investment and growth policies is also needed to create the extra economic buffers required to deal with emerging external shocks,” it said. 

“The government’s policy agenda of a 3% GDP growth target in the medium term now urgently needs an impulse, a jolt, an acceleration, so that the tailwinds in the economy outweigh the headwinds in 2025 and beyond.”