KPMG South Africa has projected that the country’s economy is on track for moderate growth over the coming years, with an anticipated expansion of 1.5% in 2025 and further acceleration to 1.8% in 2026. These figures highlight cautious optimism in the face of persistent economic challenges. However, the projected growth remains below the 2-3% benchmark required to create substantial economic transformation, indicating that structural reforms may be necessary to unlock further potential.
Key Takeaways
- Economic Growth with Lingering Challenges: While South Africa’s GDP growth is forecasted to improve moderately to 1.5% in 2025 and 1.8% in 2026, these levels fall short of what is required to address pressing issues like unemployment and structural inefficiencies.
- Inflation and Interest Rate Relief: Inflation has slowed to historic lows, prompting a cycle of interest rate cuts. This creates an opportunity for increased consumption and investment, potentially revitalising key sectors like property, retail, and manufacturing.
- Persistent Unemployment and Structural Issues: Despite macroeconomic improvements, unemployment remains a major concern, with modest reductions expected. Addressing this challenge will require transformative policies and structural reforms targeting labour market inefficiencies and economic inclusion.
Inflation Trends and Projections
The firm has indicated that inflation rates are expected to stabilise significantly, ending 2024 well below the South African Reserve Bank’s target range and remaining at subdued levels throughout 2025. This improvement in price stability sets the stage for more favourable economic conditions for both consumers and businesses. Lower inflation will likely reduce the cost of essential goods, a development that could enhance disposable income and consumer confidence, critical drivers of domestic economic growth.
With inflation consistently below target, interest rates are predicted to continue their downward trajectory. This decline in borrowing costs is expected to provide much-needed relief for households and enterprises, easing financial pressures and fostering a more supportive environment for investment and spending.
The anticipated decline in interest rates could spark increased lending activity, particularly in the property market, and may also encourage businesses to expand their operations, potentially creating new employment opportunities.
Persistent Unemployment Concerns
Despite positive economic signals, the unemployment rate remains a pressing issue. Currently hovering at an alarming 33%, it is anticipated to see only modest reductions over the forecast period. While the improving economic environment may contribute to job creation, the scale of improvement is unlikely to address the entrenched unemployment crisis in the short term. The slow pace of job creation highlights the urgency for South Africa to explore innovative labour market interventions, such as incentivising youth employment or investing heavily in vocational training programmes, to drive inclusive economic growth.
These projections form part of the broader findings in the KPMG Global Economic Outlook report. The global assessment underscores the interconnectedness of South Africa’s economic performance with international trends and challenges. The report further stresses that South Africa’s long-term growth prospects are linked to its ability to diversify its export base, reduce its reliance on commodity markets, and strengthen its position in global value chains.
Global Economic Insights
KPMG International has also highlighted an expected uptick in global GDP growth, from 3.1% in 2024 to 3.2% in 2025. However, geopolitical uncertainties, particularly in the aftermath of the US elections and potential shifts in trade policies such as tariffs, could present headwinds to growth and inflation in 2026. Emerging economies like South Africa might face additional risks from global monetary tightening cycles, which could impact capital flows and currency stability.
The improved sentiment surrounding South Africa’s economy is underpinned by several factors. These include the positive impact of the country’s general elections in May 2024, a stabilisation in electricity supply, and more recent reductions in inflation. These developments collectively contribute to a more favourable outlook for economic activity in the years ahead. Furthermore, renewed investor confidence following political stability and fiscal consolidation efforts could pave the way for increased foreign direct investment, critical for infrastructure development and industrial growth.
Performance in Early 2024
In the first half of 2024, South Africa’s economy registered an average real growth rate of 0.2%. However, this progress was constrained by elevated inflation and high interest rates, which weighed heavily on private consumption and business investment. Further compounding these challenges were electricity supply disruptions during the first quarter. This sluggish growth underscores the deep-rooted structural challenges in the economy, including inefficiencies in state-owned enterprises and persistent energy supply issues, which require immediate policy attention.
During the third quarter, GDP contracted by 0.3%, primarily driven by a sharp decline in agricultural production. Meanwhile, other sectors exhibited only marginal growth due to persistent logistical challenges and weak demand in international markets. This underwhelming performance led to a slight downward adjustment in growth forecasts for the year. Nonetheless, the government has hinted at introducing stimulus measures targeting strategic sectors such as manufacturing and renewable energy, which could help counterbalance these headwinds.
Anticipated Recovery in Late 2024
Despite earlier setbacks, expectations for stronger economic performance in the final quarter of 2024 remain robust. Improved macroeconomic conditions, including easing inflation and better electricity supply, are projected to drive recovery. The final quarter may also benefit from seasonal spending increases during the holiday period, as well as a rebound in agricultural output following favourable weather conditions.
Projections for 2025 and Beyond
The positive trajectory is anticipated to extend into 2025 and 2026, with GDP growth expected to align more closely with the pre-pandemic average of 1.7%. However, even this improved growth rate falls short of what is necessary to meaningfully reduce the country’s unemployment rate or foster significant economic inclusion. Experts argue that achieving higher growth levels will depend on accelerated structural reforms, such as streamlining bureaucratic red tape for businesses, improving digital infrastructure, and overhauling public procurement processes.
Inflation at Historic Lows
By October 2024, inflation had dropped to 2.8%, a dramatic decline from 5.3% earlier in the year and the lowest rate recorded since February 2021. This sharp reduction has been instrumental in prompting the South African Reserve Bank to initiate a cycle of interest rate cuts.
The sustained drop in inflation is also expected to reduce the burden on low-income households, who spend a significant portion of their earnings on necessities.
Impacts of Lower Interest Rates
The ongoing reduction in interest rates is expected to have a positive impact on household and business finances, encouraging increased consumption and investment activity. The primary contributors to inflation continue to be housing and utilities, followed by certain food categories, non-alcoholic beverages, and financial services. If managed effectively, lower interest rates could stimulate the property and retail sectors, providing a much-needed boost to the broader economy.
Monetary Policy Outlook
As inflation remains below target, monetary policy is forecasted to become even more accommodative in 2025. This loosening is expected to support broader economic recovery efforts and bolster growth across multiple sectors. Policymakers have indicated that maintaining this trajectory will require consistent fiscal discipline, coupled with a focus on improving the country’s creditworthiness to attract long-term investment.
Through these developments, South Africa’s economic trajectory appears poised for gradual improvement, although significant structural challenges, particularly high unemployment, continue to pose substantial hurdles. Overcoming these hurdles will necessitate a collaborative approach involving both public and private sectors to craft policies that promote sustainable and inclusive growth.
Conclusion
South Africa’s economic outlook reflects a cautious but promising recovery, underpinned by stabilising inflation, declining interest rates, and improved electricity supply. However, the growth forecast remains insufficient to tackle entrenched issues like high unemployment and structural inefficiencies. Moving forward, sustained recovery will depend on bold reforms to improve productivity, encourage investment, and create inclusive opportunities. Achieving this will require a coordinated effort from government, businesses, and society to unlock the full potential of South Africa’s economy and ensure shared prosperity.
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