On Balance - Economic Update May 2025
- Dr Roelof Botha
- Jun 3
- 3 min read
Updated: 1 day ago
The downside
On 21 May, millions worldwide were glued to their TV sets in anticipation of the highly publicised meeting between the president of the world's most powerful country and the head of state of the African continent's largest and most diversified economy. It turned out to be quite entertaining, almost resembling a soap opera, with a cast that included two internationally renowned golfers, the wealthiest person in South Africa, and the richest person in the world.
Despite some simmering hostility over President Trump's tariff policies and misconceptions regarding racial tensions in South Africa, President Ramaphosa said afterwards that he had a "delicious" lunch with his counterpart. He even hinted at the strong possibility of President Trump visiting South Africa in November for a G20 meeting. More importantly, South Africa had submitted a framework agreement to the US regarding issues related to increasing the flow of trade and investment between the two countries. The so-called "Trump tariffs" have negatively affected South Africa's metal product exports.
Several key indicators released in May point to a continuation of lethargic growth in the economy, particularly the low values for building plans passed in the metros and larger municipalities, an increase in the unemployment rate, and a decrease in capacity utilisation in manufacturing. Despite the recent resumption of the rate-cutting cycle by the monetary authorities, the prime overdraft rate remains significantly higher than before the Covid-19 pandemic. Until economic policy is eased more aggressively, the country will stay in a low-growth trap.
The upside
Welcome drop in the repo and prime rate
After halting the rate-cutting cycle in March, the Monetary Policy Committee (MPC) of the Reserve Bank has lowered the repo rate by 25 basis points. The prime overdraft rate of commercial banks now stands at 10.75%, which is 75 basis points higher than before the COVID-19 pandemic, when the consumer price index (CPI) was around 4.4—virtually on the nose of the midpoint of the inflation target range (3—6%).
The CPI is currently 2.8% and has been below or within the target range for seven successive quarters. The property sector will welcome the news of a rate cut, as the BetterBond Index of home loan applications remains lower than before the restrictive monetary policy kicked in at the end of 2021.
A significant percentage of residential property sales are related to owners who cannot afford the sharp increase in the debt service costs/disposable income ratio, which stands at 8.9% and remains 33% higher than at the beginning of 2022.
Fortunately, the Producer Price Index (PPI), a leading indicator of consumer inflation, is at a record low of 0.5%, which bodes well for the prospect of further rate cuts in 2025.
Positive news from S&P Global
The Purchasing Managers' Index (PMI) for South Africa's private sector, compiled by S&P Global, rose to the neutral mark of 50 in April, after spending four consecutive months in negative territory. Increases in new orders, output and employment are driving the recovery. According to the accompanying statement on the PMI, early signs encourage an improvement in business conditions during the year's second quarter.
Further positive news from S&P Global Ratings is the affirmation of South Africa's long-term foreign and local currency debt ratings, while maintaining its positive outlook for the country's financial stability. The National Treasury would have been delighted at the latter decision, as it provides a de facto stamp of approval for the 2025 National Budget, which has finally been tabled in Parliament (at the third attempt).
Rand strengthens further
Hot news on the forex front is the relentless rise in the real effective exchange rate (REER) of the rand (the trade-weighted average exchange rate against the country's 20 largest trading partners, adjusted for inflation differentials), which is at its highest level in 14 years. Currency weakness does not pose a threat to domestic inflation, which should lead to further interest rate cuts in 2025.
During May, the South African rand was the star performer amongst the core group of eleven key emerging market currencies monitored by Currencies Direct, strengthening by 3.1% against the US dollar (compared to the trade-weighted average appreciation of 0.7% by the whole group).
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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