Economic Update December 2025
- Dr Roelof Botha
- Jan 13
- 3 min read
Updated: Jan 16
The downside
In December, the Inclusive Society Institute published a research report on the damage inflicted on the South African economy by excessively restrictive monetary policy, which led to record-high interest rates and subsequent GDP growth barely above zero. The report highlights findings from several empirical studies across a broad spectrum of Emerging Markets and Developing Economies that confirm the detrimental impact of high interest rates on capital formation and economic growth. A common conclusion was that high interest rates constrain developing economies' ability to sustain their transitional levels, owing to the inhibiting effect of inadequate demand, particularly on the domestic manufacturing sector. This is precisely what has occurred in South Africa, with manufacturing capacity utilisation remaining below pre-pandemic levels and the country shedding jobs at an alarming rate. According to the latest quarterly employment statistics published by Statistics SA, a total of 350,000 jobs have been lost over the past two years.
It is therefore unsurprising that the latest BER/Absa purchasing managers' index (PMI) for manufacturing has declined to a multi-year low. In addition to the fact that the prime rate remains above pre-pandemic levels (despite recent interest rate cuts by the Reserve Bank), the extraordinary strength of South Africa's currency is not assisting the economy's ability to grow at higher rates. Cheap imports are not only threatening the manufacturing sector but also the South African Revenue Service's ability to generate tax revenue from higher employment and value added. Further meaningful interest rate cuts are urgently required to reverse this predicament.
The upside
Capital formation edging up
The private sector is exhibiting renewed confidence in the economy's future, as evidenced by a healthy upward trend in fixed capital formation, as illustrated in the graph. The declining trend in this key indicator took a significant hit between 2017 and 2021, due, first, to the lack of investor confidence stemming from state capture and, second, to the lockdowns imposed by the COVID-19 pandemic. The erosion of competence within key state-owned enterprises, most notably Eskom and Transnet, was driven by the cadre deployment policy, combined with large-scale corruption, as detailed by the Zondo Commission Report.
Fortunately, enhanced cooperation between the private and public sectors has occurred over the past three years, leading, inter alia, to significant investments in renewable energy, most notably photovoltaic installations. As a direct result of excessively restrictive monetary policy, which led to the highest interest rates in 15 years, the upward momentum in private-sector capital formation was derailed during 2023 and 2024. Since September 2024, the Reserve Bank has initiated an interest rate-cutting cycle, reducing the prime overdraft rate from 11.75% to 10.25% as of the beginning of January 2025.
It is especially encouraging that private sector capital expenditure on assets related to buildings and construction works has experienced a profound recovery. Between the first quarter of 2024 and the third quarter of 2025, this figure averaged R18.6 billion per quarter, 85% higher than the average for 2022 and 2023.
Construction activity represents the most labour-intensive sector of the economy. Further interest rate cuts, combined with greater private-sector involvement in repairing logistics infrastructure, could play a key role in achieving higher economic growth and employment creation.
House prices continue recovering
The loss of effective working days during the summer holidays did not prevent average house prices (for buyers whose bonds are administered by BetterBond) from continuing an upward momentum, with a year-on-year increase of 3.3% recorded in the fourth quarter of 2025. The increase for first-time buyers was lower at 2.2%, which is marginally less than the annualised increase in the consumer price index.
These datasets confirm the continued existence of a market environment that favours buyers, particularly against the background of the significant decline in the number of new houses built. In nominal terms, a new record high for the average house price paid by FTBs was achieved, namely just above R1.3 million. It is clear from the latest average house price trends that the negative impact of restrictive monetary policy between 2022 and 2024 on the housing market is still being felt, although a turning point has been reached. Hopefully, the rate-cutting cycle that started in September 2024 will continue in 2026.
On Balance, by Dr Roelof Botha, deliberately emphasises positive news, which often highlights the resilience of the South African economy and the immense scope for new business opportunities.
Comments