Policy Uncertainty Index drops sharply due to various local and global risks

The Policy Uncertainty Index for the first quarter of the year dropped sharply due to various local and global risks. When economic policy uncertainty is strongly present in the environment, it indeed lowers investment, employment and output.

In addition, high levels of policy uncertainty inhibit meaningful investment and consumption, while elevated policy uncertainty contributes to sluggish growth. Economic policy uncertainty then has actual consequences for the economy.

The latest Policy Uncertainty Index of the North-West University (NWU) Business School inevitably reflected a sharp increase in policy uncertainty for external and internal reasons, but it can be reversed if the right actions are taken, says Professor Raymond Parsons, economist at the NWU Business School.

In response to various global and domestic developments over the past few months, the Index increased much further into negative territory to 78.6 from 65.7 in the fourth quarter of 2024 as expected, a record high for the Index as persistent negative factors again outweighed positive ones.

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Quarterly Policy Uncertainty Index with baseline of 50

The Index was launched in early 2016 and is published each year in January, April, July and October. An increase beyond 50 reflects heightened policy uncertainty, while a decline means reduced uncertainty.

Parsons says the role of policy uncertainty has loomed large in much of the recent economic debate in the country, as it is regarded to have important implications for business confidence and the investment climate in the country.

“Hardly any recent economic assessment or media release from international or local financial institutions, business lobbies, economic analysts, financial journalists, or credit rating agencies appears without the inclusion of the words ‘policy uncertainty’ occurring in them.

“There have been many manifestations of policy uncertainty in South Africa over the years. The institutional setting and policymaking environment clearly influence the extent to which negative shocks and developments lead to bad outcomes and tough policy challenges.”

He says a deeper understanding of how uncertainty ‘shocks’ affect the South African economy helps policymakers assess how future shocks will affect markets and business. The drop in the policy uncertainty was the net outcome of the Index’s calibration of positive and negative factors influencing the country’s policy uncertainty level.

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Tariff wars and heightened geopolitical tensions shape policy uncertainty

According to the Index, the global economic outlook in the first quarter was largely shaped by emerging tariff ‘wars’ and heightened geopolitical tensions, leading to various global growth forecasts now being trimmed.

The OECD, for example, recently reduced its growth forecasts for most major economies, including the US economy. On 19 March, the US Fed also sharply cut its US growth projections for 2025.

The more muted outlook on future global economic prospects therefore arises from a convergence of geopolitical risks, elevated economic uncertainty and unpredictability consequent on ‘Trumpanomics’ and tariffs and a resultant tangible repricing of risks in financial markets.

The World Bank projects the gross domestic product (GDP) growth rate in Sub-Saharan Africa to reach an average of 4.2% in 2025. However, for economic and political reasons, the bank sees the risks to the region as tilted to the downside, especially on the trade front.

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Not all negative in high-frequency data for SA

However, on the positive side, South Africa’s high-frequency domestic data, such as consumer spending, retail sales, and new vehicle sales, indicate that an economic upturn has indeed been taking place, although the recovery has been slow and uneven so far. GDP growth in 2025 is projected at about 1.6%, compared to 0.6% in 2024.

According to the recent 2024 Nedbank Capital Expenditure Project Listing Survey, although total fixed capital formation has now been increasing faster since 2021, public sector investment plans have replaced private sector plans as the main driver. Capital investment is the kingpin of the growth rate.

Regarding the ongoing political and diplomatic tensions between South Africa and the US, the Index indicates that it created anxiety about ensuing economic relations, such as around the future of the African Growth and Opportunity Act (Agoa).

Then there was also disappointment about the revised Budget not conveying a much more urgent ‘growth-friendly’ message. Extended political and policy uncertainty now still also surrounds the amended Budget proposals presented to parliament.

The South African Reserve Bank (Sarb) also opted at its meeting in March to leave the repo rate on hold. The Monetary Policy Committee (MPC) statement emphasised the mounting global and domestic economic uncertainty for its decision to pause.

However, inflation was nonetheless seen as ‘contained’ for now. The MPC trimmed its 2025 growth forecast to 1.7% and expects downside risks to the growth outlook.

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Accelerated structural reform is the best option for growth

The Index report also emphasises that accelerated structural reforms remain the best pathway to the GNU’s desired overall 3% growth target. A strategic pivot in growth strategy will also help to create the economic buffers and resilience needed to deal with any external shocks.

According to the Index report, South Africa’s economic steersmanship must, therefore, see that it stays on the right track in ways that ensure that tailwinds will outweigh headwinds in 2025.

“Government policy as well as business strategies must 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 says.

“For South Africa, accelerated structural reforms remain the best pathway to the GNU’s overall 3% growth target.”