SA economy expected to improve in 2025, but geopolitical risks remain

Economists believe that South Africa’s economy will improve in 2025 but warn that geopolitical risks remain elevated with post-US election policies, including possible tariffs, potentially hitting growth and inflation in 2026.

Johann Els, group chief economist at Old Mutual, expects that growth in the world economy will slow modestly in 2025, with increased uncertainty due to US tariff policies.

He also predicts that Inflation will slow further, but at a more moderate rate than in 2024, with more repo rate cuts in the first half of the year in developed countries as well as in emerging economies.

For the South African economy, Els expects that growth will be influenced by a combination of structural and cyclical improvements.

“Structural improvements that will lift growth and further boost confidence include electricity, logistics, reforms, implementation of a fiscal rule and a lower inflation target. Implemented in a more coordinated fashion these will lift confidence.”

South Africa had no load shedding for the past nine months and no serious load shedding is expected, although further reforms are needed, he says.

“Logistics is still a serious impediment, but Transnet volumes are picking up, which is positive for exports. If this trend continues, there will be less drag on gross domestic product (GDP) growth.”

Operation Vulindlela 2.0 reforms, with a focus on municipalities, the cutting of red tape stifling low-cost property development, sorting out PRASA issues and digital transformation will further ease structural constraints, he says.

“Implementation of a fiscal rule and lower inflation target are perhaps not imminent but coming within a year or two.”

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Cyclical growth improvement for the SA economy in 2025

Cyclical growth improvement includes post-election business and consumer confidence improvement, as well as improved consumer finances thanks to lower inflation, lower interest rates and continued employment growth.

Els also predicted an improved environment for fixed investment growth regarding infrastructure and private production capacity.

He expects that the economy will grow in 2025 by 2.2%, from an estimated 0.5% in 2024, mainly based on stronger consumer spending, fixed investment and better export performance.

For 2026, Els expects growth to remain largely around 2025’s level at 2.4%, while there will be further structural improvements but less cyclical support.

In addition, Els expects that inflation will stay low for longer as there will be very little upward pressure.

The global base case suggests a Brent oil price of around $65 – $70 per barrel for 2025, while he expects food inflation to drift up slowly during the first half of the year before accelerating somewhat in the second half to reach 6% by the end of 2025 from the current 1.6%.

“Inflation expectations have downshifted sharply. Demand pick-up could mean less downside potential for consumer-goods inflation, while there is no strong upside. I expect headline inflation below 4.5% during 2025 with below 4% in the first half before drifting slowly towards 4.5% by the end of 2025.

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Interest rates expected to be lower over short term

Els expects that interest rates will be lower over the short term and anchored lower over the longer term.

“While current and forecast inflation suggests 100 to 125 basis points in further rate cuts, there will likely only be another 50 to 75 basis points cuts over the first few Monetary Policy Committee (MPC) MPC meetings of 2025. Rates should then hold through to the end of 2026.”

Regarding fiscal policy, Els agrees with Treasury’s view that the debt ratio will stabilize in 2025/2026 and then gradually decline.

He says the Rand is unlikely to weaken significantly from current levels, with the base case expectation being that the Rand-/dollar exchange rate will be more stable in 2025.

However, he says the US election outcome somewhat dampened his previous view of a much stronger Rand exchange rate, although he still expects the Rand to strengthen from current oversold levels.

“Policies of the incoming US administration will likely no longer lead to a much weaker US dollar.

“Uncertainty around implementation regarding their timing and extent will still lead to further rate cuts in the US and therefore I still expect some softening in the US dollar.

“The Rand is expected to strengthen in the short term and it is also more stable in the longer term thanks to a potential lower inflation target, an improved fiscal situation thanks to better growth, improved ratings and less political risk.”

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More optimistic view of SA’s economy for 2025

Frank Blackmore, lead economist at KPMG, says the positive sentiment following South Africa’s general election, the improved performance of electricity supply as well as more recent reductions in inflation underpin a more optimistic view of the economy for 2025.

“Stronger economic growth is expected over the final quarter of 2024 on the back of the improved macroeconomic environment.

“The positive momentum is expected to continue into 2025 and 2026 with GDP growth forecast to improve over this period to levels around the average of 1.7% experienced over the ten years leading up to the Covid-19 pandemic.”

However, Blackmore points out, this is still below what is required to make a meaningful impact on economic inclusion to absorb a significant proportion of the unemployed into the labour market.

“Consequently, unemployment is expected to still be elevated with only slight improvements over the forecast period due to the upwardly adjusted economic growth expectation.”

David Lerche, chief investment officer at Sanlam Wealth, says Sanlam expects inflation to be around 4.3% in 2025.

“South Africa’s growing momentum should accelerate in 2025. The flywheel of lower inflation, lower interest rates, better electricity availability and the government of national unity drives confidence for both businesses and consumers.

“Assuming no major external shocks, this self-reinforcing cycle should be positive for our local stock and bond markets as well as our currency in 2025.”

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