Absa foresees economic growth of 2.1%, but Trump and budget can disrupt it

Although economists at Absa forecast economic growth of 2.1% for this year as well as next year, Trump’s policies and tariffs as well as the battle to pass Budget 2025 can disrupt the growth that the country needs to make a dent in unemployment.

Discussing South Africa’s quarterly perspectives, Miyelani Maluleke, senior economist and Sello Sekele, economist at Absa say they expect economic growth to improve as headwinds have abated.

“Improvements in electricity and logistics infrastructure have largely been sustained. More recent cyclical constraints, including inflation, have been subdued, supporting a recovery in household finances. These factors have propped up economic activity and private sector confidence.

“Although our 2024 gross domestic product (GDP) growth forecast is 0.4% lower at 0.6% since the last quarterly perspectives, mainly due to a sharp drop in agriculture output, our medium-term growth forecasts are broadly unchanged. We forecast real GDP growth of 2.1% for 2025 and 2026.”

They point out that household finances are on the mend and should underpin further spending recovery, with real household disposable income increasing in the second and third quarters of 2024 after shrinking for four consecutive quarters.

ALSO READ: SA economic outlook positive, but key risks threaten economic growth

Inflation contained, additional spending could help economic growth

With inflation likely to remain contained, real wages should benefit, Maluleke and Sekele say. “Lower interest rates will also provide relief. We estimate that household debt service costs will be about R25 billion lower in 2025 compared to 2024.

“The potential from additional spending from two-pot withdrawals this year is unclear, as data suggest a marked slowdown in the pace of withdrawals in recent months.”

In addition, they say that CPI disinflation seems to have largely run its course. “Consumer inflation has largely surprised to the downside in recent quarters. However, the recent weakening in the rand, some dissipation of favourable base effects, big increases in medical insurance premiums and electricity tariff hikes that kick in from mid-year should see inflation drifting higher, particularly in the second half of the year.

“Our baseline forecast is for headline inflation to average 4% in 2025, with a temporary upside breach of the mid-point of the target range in the fourth quarter.”

Maluleke and Sekele believe the repo rate easing cycle of the South African Reserve Bank (Sarb) is nearing its end. “The Sarb cut the repo rate by 25 basis points in January but cautioned that the external environment had become more challenging and uncertain, especially with the threat of escalation in trade tensions.”

ALSO READ: This is what proposed 2% VAT hike did to consumer confidence

External environment: the real threat to economic growth

They also point out that the external environment is a major source of uncertainty, with the new US administration looking set to cause further disruption to the global economy with trade restrictions imposed against China and even larger disruptions threatened against the US’s second and third-largest trading partners.

“The effects of this and potential reciprocation by the partners obscure the global and domestic macroeconomic outlook. The risk of further escalation in SA/US diplomatic tensions is also an important risk to monitor.”

Maluleke and Sekele say they believe ongoing trade tensions, SA/US diplomatic relations, G20 Summit preparations, the Sarb’s inflation target conference in March, National Treasury’s discussion document, Transnet’s operational performance, progress with the second phase of Operation Vulindlela and political relationships within the government of national unity (GNU) must be closely monitored in the coming quarters.

They say that while the domestic environment has improved, the external environment is now a major downside risk to the outlook. “Our baseline view assumes broadly steady real economic growth, lower inflation and further monetary policy easing in major global economies, but uncertainty is high in view of the new US administration’s policies that could disrupt the global economy.

“The effects of the US’ protectionist policies on global supply chains and the degree to which these tensions in economic relations widen into full-blown trade wars may have serious ramifications for the global and domestic economy.”

ALSO READ: Trump’s tariff threats will affect SA’s economy — experts

Trump policies and tariffs could hurt SA, but GDP could reach 2.1%

It also does not help that South Africa is directly caught in the crosshairs with Trump’s administration after the US president made unsubstantiated claims about the country’s land policies, Maluleke and Sekele say.

“These claims have since been repeated by a number of other US officials, including the secretary of state. With a Trump administration that appears more confrontational and willing to use tariffs as a weapon of foreign policy, there is some concern about the risks to South Africa’s own trade relations with the US.

“In particular, South Africa’s participation in the Africa Growth and Opportunities Act (Agoa) remains a source of vulnerability. But as we have argued previously, an exit from Agoa on its own would likely have a limited direct effect on South Africa in the short term.

“In the long term, investment from foreign companies, both from the US and others, could be smaller than otherwise expected, potentially leading to greater economic losses in the future. Moreover, the possibility that the Trump administration imposes additional restrictive trade measures against South Africa cannot be ruled out.”

While this is a downside risk, and they acknowledge a more uncertain environment, Maluleke and Sekele say they believe the domestic environment has enough momentum to deliver an improvement in economic growth this year.

“Our economic growth forecasts are only slightly lower than in our previous quarterly perspectives, but we see real GDP growth of 2.1% for 2025.”