OECD Economic Outlook, Volume 2025 Issue 1

South Africa

GDP is projected to increase by 1.3% in 2025 and 1.4% in 2026. High uncertainty and declining confidence will weigh on domestic demand, though easing monetary policy will provide support. The increase in tariffs on imports into the United States will weigh on exports. An easing in access to pension savings from late 2024 will support consumption. Inflation will fall in the near term following the decline in global oil prices, but will strengthen during the second half of 2025 and in 2026, as activity strengthens.

Fiscal consolidation in 2025 and 2026 will help stabilise public debt. Reinforcing spending rules and broadening the narrow tax base would further support debt sustainability. Monetary policy is projected to continue easing in 2025 to slightly below neutral rates. Continued progress in reforms to improve the efficiency and governance of state-owned enterprises, to increase the supply of electricity, and to ease logistics bottlenecks and regulation will support investment and stronger potential growth.

Consumer confidence has fallen and exchange rate volatility has increased

Consumer confidence fell in the first quarter of 2025 alongside domestic political uncertainty and geopolitical tensions, wiping out more than its increase over 2024. Business confidence remained above its long-term average in the first quarter of 2025. The unemployment rate increased to 32.6% in the first quarter of 2025, after having declined over the previous three quarters. Core inflation continues to ease, reaching 3% in April, slightly above headline inflation, which was 2.8%.

The United States has increased tariffs on imports from South Africa to 10%, though the exclusion of certain critical minerals and bullion slightly lowers the effective rate. South Africa sends around 7.6% of its exports to the United States, limiting the impact on GDP. Spreads between South African and US long-term bond yields have increased in recent months, suggesting that the perceived risk of investing in South Africa has increased. The exchange rate against the US dollar depreciated sharply in early April, although it has reversed since then.

South Africa

Source: OECD Exchange rates database; and OECD Economic Outlook 117 database.

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South Africa: Demand, output and prices

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Fiscal policy is consolidating while easing monetary policy will support activity

The primary fiscal balance excluding one-off items is projected to improve by 0.2% of GDP in 2025 and 0.8% of GDP in 2026. Revenue measures include no inflationary adjustment to income-tax brackets, adding 0.2% of GDP of revenues in each fiscal year, and additional tax measures to be announced in the 2026 Budget, representing 0.2% of GDP for the 2026/27 fiscal year. Conversely, expenditure as a share of GDP is expected to rise in the 2025/26 fiscal year, before easing. This is driven by a 0.2% of GDP rise in water, sanitation and road infrastructure investment and exceptional debt relief for the state electricity operator, Eskom, of around 1% of GDP. Transfers from the central bank to government accounts (via the Gold and Financial Contingency Reserve Account), equivalent to 0.3% of GDP, will contribute to debt reduction for the second consecutive year, albeit to a lesser extent. The central bank lowered policy rates by 75 basis points to 7.5% between September and January as inflation eased. Rates are projected to decrease by a further 50 basis points over 2025. Further volatility in the exchange rate is creating significant uncertainty around the outlook for inflation and monetary policy.

Activity will increase moderately, amidst significant uncertainty

The economy is projected to grow moderately in 2025 and 2026. Monetary policy easing and progress in electricity availability are set to support investment. Private consumption will benefit to some extent from the 2024 pension reform, which eases access to retirement funds. Exports will increase only gradually, though, weighed down by the increase in US tariffs. As economic growth strengthens gradually and the negative output gap narrows, inflation will rise to 4.2% in 2026 and the unemployment rate will decrease slightly to 32.1% in 2026. Risks to the outlook remain high. On the downside, trade tensions have heightened uncertainty and slower progress than expected in easing freight and port bottlenecks could weigh on activity. On the positive side, accelerated reform of electricity availability would strengthen the recovery in investment, boosting potential growth.

Swiftly implementing reforms would support fiscal consolidation and investment

High government debt-servicing costs, close to 22% of revenues, are limiting the fiscal space available for social and growth-enhancing policies. Strengthening the fiscal framework through stricter spending controls and reinforced fiscal rules anchored to a stable debt target would support fiscal consolidation and help reduce the risk premium, as well as the risk that elevated government borrowing crowds out private investment. Swift implementation of reforms will be key to boosting the current low level of investment. Easing burdensome licensing, permits and complex procurement rules will support firm entry and expansion. Reforms in the electricity sector would enhance businesses’ ability to operate efficiently and strengthen their incentives to invest. Lastly, creating a business-friendly environment would support rail investment needs by reforming the governance of transport state-owned enterprises, including by establishing a regulator and promoting competition.