Policy Uncertainty Index falls, confirming uneven economic recovery

The Policy Uncertainty Index compiled by the North-West University (NWU) Business School unexpectedly decreased much further into negative territory to 65.7, compared to 53.5 in the third quarter, confirming South Africa’s uneven economic recovery.

An increase in the index above 50 reflects heightened policy uncertainty, while a decline means reduced uncertainty. Policy uncertainty is seen to have important implications for business confidence and the investment climate in the country. More policy certainty encourages investors to invest in South Africa.

Unpacking the three elements constituting the latest Policy Uncertainty Index shows that:

• the media data reflected a significant increase in references to policy uncertainty;
• the survey of economists assessed the level of uncertainty as slightly higher in the fourth quarter;
• the University of Stellenbosch’s Bureau for Economic Research survey of manufacturers experiencing policy/political uncertainty eased from 63 to 60.

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Negative policy uncertainty factors outweighed positive ones

 Professor Raymond Parsons, economist at the NWU Business School, says the index shows that negative factors outweighed positive ones over the last three months but although it moved further into negative territory, it also identified the relevant data confirming South Africa’s slow but uneven economic recovery.

“Business and consumer confidence have been boosted in recent months by factors such as much lower inflation, the easing of interest rates, heavy withdrawal of pension funds under the two-pot retirement system, the cessation of load shedding and the formation of the government of national unity (GNU).”

He also points out that the South African Reserve Bank (Sarb) says that currently, household spending or consumption is doing most of the heavy lifting in South Africa’s improved growth prospects.

However, despite these positive factors and other high-frequency data, the poor gross domestic product (GDP) growth figures for the third quarter were unexpected and disappointing, he says.

“Even when the bad agricultural numbers were stripped out, the rest of the economy was showing minimal growth. Forecasts for growth in 2024 and 2025 had to be trimmed.”

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Fixed capital formation, a major lagging indicator

Parsons says fixed capital formation emerged as a major lagging indicator in South Africa’s economic performance. “Factors shaping business confidence are not identical to those driving the level of investor confidence.

“Research confirms that policy uncertainty in the aftermath of elections encourages private actors to delay investments that entail high costs of reversal. Both external and internal uncertainties are therefore pertinent to the elevation of the Policy Uncertainty Index for the fourth quarter.”

Globally, the International Monetary Fund (IMF) and other surveys project world economic growth at about a steady 3.3% performance next year, similar to 2024, Parsons says. “For now, the world economy therefore remains broadly supportive of the domestic economy.

“However, geopolitical conflicts and trade tensions, such as may emerge from a US Trump administration, have the potential to generate persistent uncertainty and disrupt world trade and finance.”

He also points out that global concerns and uncertainties have now arisen about the wider impact of intended foreign and tariff policies by US President-elect Trump. Parsons warns that there could subsequently be collateral damage to several other trading arrangements, such as the African Growth and Opportunity Act (Agoa), where South Africa has an important stake.

A recent Stanlib survey confirms that South African corporates have been extremely cautious so far when investing in their local operations, but Parsons says hosting the G20 next year is a great opportunity to ‘showcase’ the local economy.

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Elevated policy uncertainty is reversible

“Elevated policy uncertainty is reversible if the right steps are taken with the domestic policy instruments that are under the country’s control. If setting and implementing the GNU agenda is one of the strategic themes of 2025, then staying on the right economic track is another crucial one.”

Parsons is upbeat about the country’s prospects for next year. “Compared to twelve months ago, 2025 promises to be a relatively good year for the economy where the economic and political tailwinds will outweigh any headwinds.”

A better business and market mood also enveloped the formation of the GNU and although it is still early days, Parsons says the creation of the GNU has meant reduced political risks and the promise of speedier economic reforms.

“There have also been recent more positive outlooks on the credit rating front by the major rating agencies. South Africa can now also advance its economic agenda, as well as influence the key geopolitical environment, through its hosting of the G20 and B20 meetings in 2025.”

He says the index indicates that as South Africa enters 2025, the challenge is now to build on better short-term business confidence and convert it into long-term investor confidence. “In a nutshell, short-run optimism must be transformed into long-run commitments to underpin sustained economic growth.”