By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
We have made modest adjustments to our macroeconomic projections following the release of the 4Q24 quarterly bulletin. The updated forecasts incorporate the anticipated impact of the proposed VAT increase, fiscal drag, and the associated decline in consumer confidence. Additionally, we have assessed the implications of ongoing United States (US) trade policy recalibration and the potential exclusion from the African Growth and Opportunity Act (AGOA), identifying downside risks to our macroeconomic outlook. We estimate a potential drag on real GDP growth ranging from 0.1 percentage points (ppts) to 0.4ppts.
Domestic policy and political considerations
Regarding local political dynamics, we do not foresee changes in the political landscape that would alter our baseline view on economic reforms. However, the situation remains complex, and the probability of an accelerated reform scenario remains low.
Economic growth projections
While we remain cautiously optimistic about the economy's recovery, we have revised our real GDP growth projections slightly downward. This reflects a weaker external environment, increased household tax burdens, and subdued consumer sentiment. The anticipated rebound in fixed investment, following a 3.7% contraction last year, is expected to be constrained by continued policy uncertainty (see forecast table overleaf).
Real GDP growth has been revised down by 0.1ppt, with projected growth now at 1.6% for 2025, 1.7% for 2026, and 2.0% for 2027.
Inflation and monetary policy outlook
Inflation expectations for 2025 have been adjusted downward to 3.8% from 4.0%, reflecting subdued inflationary pressures. The VAT increase is estimated to contribute approximately 0.1ppt to inflation. Over the 2025-2027 forecast period, inflation is expected to average 4.4%, creating some scope for the South African Reserve Bank (SARB) to extend the interest rate cutting cycle by a further 50 basis points (bps), cumulatively before year-end. However, global headwinds and the related volatility remain a risk to the broader monetary policy outlook.
Household consumption
The consumer sector is expected to be a key driver of economic growth recovery, which has been below 1.0% over the past two years. A strong performance in new passenger vehicle sales has been buoyed by interest rate cuts and the gradual replenishment of household balance sheets. However, the VAT increase, effective 1 May 2025, is expected to weigh on consumption, along with the impact of bracket creep. As a result, we have revised our household consumption growth forecast downward by 0.2ppts, with growth now projected at 2.0% for 2025 and remaining at this level through 2027.
Trade and external risks
The US-imposed 30% tariff on South African exports and the potential exclusion from AGOA add significant uncertainty to the trade outlook. The impact on South African exports will depend on factors such as the price elasticity of demand, whether SA exports can still compete in the US market, and the extent to which exporters can divert goods to alternative markets. However, while export market diversification is critical, the US remains South Africa's second-largest trading partner after China, underscoring the importance of maintaining strong bilateral trade relations. In 2024, South Africa exported goods worth R156.9 billion to the US, including precious metals, transport equipment, iron and steel products, mineral resources, and agricultural commodities. Given this, fostering better trade relations with the US is crucial for sustaining economic growth.
Overall, while South Africa's economic recovery unfolds, risks from both domestic and external factors necessitate cautious optimism. The adjustments to our macroeconomic projections reflect evolving fiscal policies, global trade uncertainties, and the complex political landscape. Continued vigilance will be required to navigate these challenges effectively.
Week in review
Private Sector Credit Extension (PSCE) continues to show signs of fragility, despite lower borrowing costs. In February, PSCE slowed to 3.7% y/y, down from 4.6% in January. Household credit remains particularly weak, lagging corporate credit. Total loans and advances extended to firms slowed marginally to 5.1%, down from 5.3% in January. This was supported by a continued, steady rise in commercial mortgages, which rose from 5.3% to 5.5%, as well as general loans and advances, which accelerated from 4.2% to 4.8%. However, these gains were offset by a significant slowdown in overdrafts (from 11.5% to 4.9%) and instalment sales (largely commercial vehicle finance, from 5.2% to 4.7%). Supply of credit to households remained constrained, slowing to 2.7% from 2.9%. General loans and Overdrafts remain extremely weak at -1.5% and -2.1% respectively, reflecting elevated defaults, with general loans remaining in contraction for almost a year now (since April 2024). Mortgages also remain subdued at 2.1% from 2.3%, the lowest print in over a decade (since September 2014). On a brighter note, instalment sales (predominantly car finance, but also includes durable goods like furniture) and credit cards remain relatively robust at 6.2% and 8.4%, respectively. Overall, these trends reflect the still restrictive interest rate environment impacting household demand and supply for credit.
The trade balance recorded a surplus of R20.9 billion in February, reflecting a strong rebound from a deficit of R16.8 billion in January. This was driven by exports, which increased by 10.4% m/m to R164.0 billion, while imports declined by 13.5% to R143.1 billion. Year-to-date (January to February), the trade balance recorded a R4.1 billion surplus, reflecting a deterioration from the R14.2 billion surplus recorded over the corresponding period last year. We expect the trade surplus to be lower this year than in 2024, leading to a slightly wider current account deficit of 0.9% of GDP compared to 0.6% last year.
The manufacturing PMI improved slightly in March, rising from 44.7 index points to 48.7, albeit remaining below the neutral mark for the fifth consecutive month and suggesting a continuation of subdued activity in the manufacturing sector. Both business activity and sales orders lifted to just over 48 points as export sales improved despite weakening global trade cooperation and local logistical constraints. Furthermore, purchasing prices eased, with a stronger rand sheltering import prices. Concerningly, manufacturers are becoming progressively less optimistic about the near-term outlook and trade tensions, rising local political uncertainty, and the impact this will have on confidence in the reform agenda as well as the rand, will likely worsen conditions. That said, recent destocking by manufacturers could support some production growth if demand holds up better than currently feared.
Total new vehicle sales grew by 12.5% y/y in March to 49 493 units, stronger than the 7.2% growth recorded in February. This was underpinned by new passenger car sales, which rose by 25.3% y/y to 33 447 units, following a 16.6% increase in February. Demand for passenger vehicles has been supported by interest rate cuts and improving consumer finances. The latest increase is also likely to have been bolstered by pre-purchases ahead of the forthcoming VAT rate hike. While growth in new passenger vehicles is expected to continue, it is likely to be constrained by the VAT increase unless dealers offer incentives to stimulate sales.
Total commercial vehicle sales contracted by 7.2%, marking the thirteenth consecutive month of annual decline. However, the extent of the decline has eased from the sharp 22.9% drop recorded in June 2024. Within the commercial segment, light commercial vehicles declined by 8.4% following an 11.3% fall in February; medium commercial vehicles declined by 1.8% after increasing by 15.0% in February; and heavy commercial vehicles declined by 0.6% after a 9.3% drop.
Electricity production increased marginally by 0.4% y/y in February, slowing from 5.7% y/y in January. Seasonally adjusted output fell by 2.5% m/m after rising by 0.4% previously. The past three months of data show a decelerating trend, without robust growth in March, electricity production will likely weigh on 1Q25 economic growth.
Week ahead
On Monday, data on South Africa's foreign exchange reserves for March will be released. South Africa's gross foreign exchange reserves amounted to $66.3 billion in February, reflecting an increase from $65.9 billion in January. This largely reflects a $230 million rise in gold reserves to $11.5 billion, supported by a 2.0% increase in the gold price. There was also a $114 million increase in foreign exchange reserves to $45.8 billion and a $44 million rise in special drawing rights (SDRs) to $6.2 billion. Besides the large increase in gold reserves, valuation adjustments contributed to these increases but were partially offset by foreign exchange payments made on behalf of the government.
On Thursday, data on manufacturing production for February will be released. Manufacturing production (not seasonally adjusted) contracted by 3.3% y/y in January, following a 1.2% y/y decline in December 2024. This weak start to 2025 is consistent with our downwardly revised GDP growth outlook and suggests that the manufacturing sector is not out of the woods yet. Seasonally adjusted manufacturing output increased slightly by 0.2% m/m, but this was insufficient to offset the 2.2% decline recorded in the previous month. The Manufacturing PMI Business Activity Index (a proxy for output) remains below the neutral 50 mark, indicating that activity in the sector remains constrained. Nevertheless, manufacturers are modestly optimistic about operating conditions in the near term. After contracting by 0.5% in 2024 and weighing on overall GDP growth, we expect a modest recovery of nearly 1.0% in manufacturing activity, supported by improving domestic demand, including fixed investment, as well as easing supply-side constraints.
