GDP is projected to increase by 1% in 2024, 1.5% in 2025 and 1.7% in 2026. Continued reforms should support a more stable electricity supply and ease logistics bottlenecks, reducing supply constraints and increasing confidence. Lower lending rates will support investment. The pension reform and improved labour market conditions will boost consumption. The main risk for growth is a return of recurrent electricity power cuts. Declines in fuel prices and the appreciation of the effective exchange rate since early-2024 are reducing inflation in the near term. The increase in activity will increase inflation over 2025.

Continued commitment to fiscal consolidation will help limit further increases in public debt. Conditional on consumer price inflation, monetary policy will continue to ease over 2025, supporting growth. Stronger potential growth and fiscal sustainability would benefit from continued progress in reforms to state-owned enterprises, especially regarding energy availability and logistics bottlenecks. Easing highly restrictive regulation would support competition, dynamic firm growth and job creation. Reducing urban sprawl and improving public transport would support inclusion and access to jobs.

Following the formation of the national government in July and uninterrupted access to electricity since end-March, confidence has increased. Business confidence has reached two-year highs while consumer confidence has reached 5-year highs in recent months. The manufacturing purchasing managers’ index has also signalled an expansion in recent months, although manufacturing output so far remains subdued. Many people are looking for work, with the unemployment rate at 32.5% in the third quarter of 2024. As fuel prices declined, annual headline consumer price inflation reached 2.8% in October, while core inflation eased to 3.9%.

The perceived risk of investing in South Africa appears to have eased, as signalled by the narrowing of spreads between South African and United States long-term bond yields over recent months. Spreads have not been as low since 2018. The appreciation of the effective exchange rate this year is lowering the prices of imported goods, helping to reduce inflation.

As inflation has eased, the central bank has lowered policy rates by 50 basis points to 7.75%. Rates are projected to stabilise slightly above 7% over 2025. The fiscal deficit is projected to reduce further, helped by a reduction in expenditure, and a boost to revenue through freezing income tax thresholds and increasing excise taxes. However, consolidation will be insufficient to prevent further increases in the public debt. This is despite a transfer from the central bank to government accounts (via the Gold and Financial Contingency Reserve Account) worth 1.4% of GDP in the current fiscal year and 0.3% over the coming two fiscal years. Consolidation is being limited by ongoing debt relief for state electricity operator Eskom, estimated at around 0.9% of GDP in the current fiscal year and 1.4% of GDP in the following fiscal year. Further transfers risk compromising debt-reduction efforts.

Activity is projected to increase over 2025 and 2026. Policy certainty is increasing following the formation of the coalition government in July. Progress in increasing electricity availability and continuing reforms suggest that availability should continue improving, boosting supply. Increased purchasing power as inflation eases and the pension reform, which alters access to retirement funds, will support consumption. Investment will benefit from lower interest rates and increased business confidence. Contractionary fiscal policy will limit government spending. Reforms will continue to ease bottlenecks in rail transport and ports, supporting exports. The increase in activity will help lower the unemployment rate to 31.7% in 2026. Inflation is projected to moderate on an annual basis from 4.6% in 2024 to 3.9% in 2025, even though the quarterly rate will rise during the year, with inflation reaching 4.5% in 2026. Further reform progress on electricity availability and logistics bottlenecks would strengthen the recovery in investment, boosting potential growth. However, a return to significant power cuts poses a downside risk to activity. Households could withdraw more from their pension than projected, boosting growth.

Elevated public debt is limiting fiscal space for labour market, social and environmental policies, whilst increasing financial risks. Maintaining a strategy of fiscal consolidation including through improving the efficiency of public services alongside raising government revenues would improve debt sustainability. Improving the performance of SOEs and continuing progress in electricity reforms would boost potential growth while limiting fiscal risks. South Africa’s regulatory framework is highly restrictive, as measured by the OECD’s Product Market Regulation indicators. Reducing regulations and administrative requirements would better support people to start a new business and firms to innovate, grow and employ workers. Many South Africans struggle in the labour market and the employment rate is the lowest across G20 economies. Reducing urban sprawl would improve labour mobility. Improving education, training and vocational education will help increase skill levels and address shortages of some skilled workers over the medium term.