On Balance - Economic Update April 2025
- Dr Roelof Botha
- May 8
- 3 min read
The downside
It took the National Treasury a while to appreciate the reality of being part of a government of national unity (GNU). This means that its most crucial task, preparing the national budget, should be conducted so that all the new government members have ample time to make spending and revenue decisions.
The fiasco, which has led to a historic failed second attempt at passing the budget, could have been avoided if more people were in the room during the initial stages of preparing the budget. The upshot of the refusal by some members of the GNU to accept the proposed VAT rate increase and the subsequent Western Cape High Court ruling in favour of this group is that the Minister of Finance has officially decided to maintain the Value-Added Tax (VAT) rate at 15 per cent from 1 May 2025, instead of the proposed increase to the VAT rate announced in the budget in March.
Unfortunately, the uncertainty surrounding the relationship between the ANC and the DA, the two largest parties in the GNU, has contributed to the poor showing of the S&P Global Purchasing Managers’ Index for South Africa. It remained below the neutral 50-mark in February and March before clawing back to precisely 50 in April.
Hopefully, the GNU will now be forced to make a concerted effort to implement some of the reforms suggested in a recent World Bank report on policies that would lead to higher and sustainable growth, especially those that pertain to a complex system of regulations and a bloated and often inefficient public sector.
The upside
Lower inflation bodes well for lower interest rates.
The consumer price index (CPI) resumed declining in March, mainly due to producer price inflation (PPI) remaining at historic lows. In March, the CPI recorded an annualised rate of increase of 2.7%, with no fewer than six items in the consumption expenditure basket in negative territory. The PPI for March also declined from the February figure and is now at 0.5%—the same as its average rate of increase over the past seven months.
These two benchmarks are below the Reserve Bank’s target for inflation (3% to 6%), confirming the dire need for a more accommodating monetary policy. The underlying cause of very low inflation is a lack of demand in the economy, as illustrated by the high and rising level of unutilised capacity in the country’s manufacturing sector.
South Africa’s economic policy priority should shift from curbing inflation to encouraging demand via lowering the cost of credit and capital investment—a view many business leaders and millions of indebted households share. Hopefully, the Monetary Policy Committee of the Reserve Bank will take due note of these developments and lower the repo rate at the May policy meeting.
Trade balance resumes upward trend.
Following the traditional blip in January, South Africa’s trade surplus returned with a bang in February and March, totalling almost R28 billion in the first quarter of the year. Since the beginning of last year, the country’s exporters have secured a cumulative trade surplus of R194 billion. Total exports during the first three months of 2025 amounted to R484 billion, breaking the all-time first quarter record established two years ago.
The significant dependence on only four export sections has remained a feature of the country’s international trade pattern during the first quarter. These product groups are minerals, precious metals, vehicles & components, and agriculture & food. These four groups accounted for more than 70% of South Africa’s total exports in the year's first three months. The positive influence of the record gold price is also evident in the latest international trade data, with the gap between export earnings of precious metals and other minerals (mainly iron ore and coal) having declined again. During the first quarter, the export earnings from precious metals posted the most significant year-on-year increase in export earnings, namely more than 15%.
Policy moves to incentivise the renewable energy sector.
A tariff review by the International Trade Administration Commission of South Africa (ITAC) of input materials and components used in wind, solar PV and battery storage facilities promises to have far-reaching implications for the renewables sector and electricity consumers alike. In a Gazette notice, Itac indicates that it will review 82 tariff codes for inputs and materials used in the renewables and storage value chains, including everything from solar panels and generators for wind turbines, to lithium-ion batteries and aluminium and steel structures used in installations.
Itac argues that global decarbonisation commitments represent an opportunity for the local production of renewables and battery products. Improving the tariff structure could increase the demand for locally produced components while enhancing the competitiveness of the local renewables value chain.
On Balance by Dr Roelof Botha deliberately emphasises positive news, which often emphasises the resilience of the South African economy and the immense scope for new business opportunities.
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