SA GDP growth is likely to disappoint National Treasury’s expected 1.9%
South Africa’s GDP growth has averaged 0.7% over the past decade (Figure 1), consistently disappointing analyst and policy makers’ expectations. In its latest budget, National Treasury forecast an average GDP growth rate of 1.9% per annum over the framework period (2025/26 to 2027/28). We expect that growth will disappoint and be closer to 1.0%. This is premised on our analysis that, while consumption could remain resilient, investment is unlikely to grow at the required pace.
Figure 1: Real GDP and real GDP growth
Source: SARB, Matrix
Economists often refer to South Africa’s structural constraints to growth. This is largely due to growth in investment having averaged -1.6% over the past decade. One way to understand the characteristics of growth and to forecast future growth is by analysing cyclical versus structural GDP.
The business cycle is driven by the cyclical components of GDP, which oscillate around non-cyclical or structural GDP (Figure 2). To get a better idea of the dynamics between these components we separate GDP into cyclical and non-cyclical time series to create a suite of three Matrix Cyclical Indices and Matrix Structural Indices (GDP, Investment and Consumption Indices). Our analysis also looks at the performance of fixed investment versus consumption as separate growth drivers, and what this implies for monetary and fiscal policy.
Figure 2: The Matrix Cyclical GDP Index vs Matrix Structural GDP Index
*Blue bars indicate recessionary periods
Source: SARB, Matrix
South Africa is likely in a recession
There are several economic indicators that suggest South Africa is already in a recession.
Firstly, cyclical GDP growth averaged -0.3% in 2024. Historically, negative cyclical GDP growth has coincided with SA being in recession (Figure 2).
Secondly, investment has been in contraction for five consecutive quarters. In 2024, cyclical investment averaged -3.2% and non-cyclical -5.0%. This degree of contraction is in line with a downward phase of the business cycle (Figure 3).
Thirdly, companies are drawing down on inventories while GDP slows (Figure 4). This is indicative of economic agents’ expectations that demand will continue to decelerate, reducing the need for additional supply. This contrasts with a drawdown in inventories in response to a spike in demand. Historically, the inventory-to-GDP ratio has never turned negative without the economy being in a downward phase of the business cycle.
Fourthly, export growth has been negative for three consecutive quarters, averaging -2.0% in 2024. This degree of contraction is coincident with past recessionary periods (Figure 5).
Figure 3: Matrix Cyclical Investment Index* in recession
*Blue bars indicate recessionary periods
Source: SARB, Matrix
Figure 4: Inventories as a ratio of GDP (%, 6MMA)
*Blue bars indicate recessionary periods
Source: SARB, Matrix
Figure 5: Export growth negative for three consecutive quarters
*Blue bars indicate recessionary periods
Source: SARB, Matrix
South Africa’s post-recession recoveries are driven by consumption
South Africa has increasingly become a consumption-driven economy, resulting in imports outstripping exports, putting pressure on the currency and job creation. While private consumption growth averaged +1.1% in 2024 and +1.4% over the last decade, investment averaged -4.0% in 2024 and -1.6% over the past decade.
During the last three recessions investment has declined as a percentage of GDP (Figure 6) and over the past two recessions consumption has increased as a percentage of GDP (Figure 7). Post these recessionary periods, recoveries have been driven by consumption rather than investment, such that investment has declined from 20% of GDP in 2008 to 14% in 2024, while household consumption has increased to 68% of GDP. For growth to move to a structurally higher rate of 2.0%, investment needs to turn a corner.
Figure 6: Investment as a % of GDP
Figure 7: Household consumption % GDP
*Blue bars indicate recessionary periods
Source: SARB, Matrix
Investment required to reach GDP growth of 2.0%
Between 1994 and 2004 GDP growth averaged 3.0%, supported by structural and cyclical investment growth of 5.4% and 5.8% per annum (Figure 8). From 2004 to 2007 GDP growth averaged 5.2% and structural and cyclical investment growth averaged 11.0% and 17.4%. Since 2017 GDP growth has averaged only 0.6% per annum with structural investment growth collapsing to -5.2% per annum.
Figure 8: Growth and investment cycles
Source: SARB, Matrix
Looking ahead, we assess how much growth we can expect over National Treasury’s medium-term expenditure framework (MTEF), versus the 2.0% budgeted. In this scenario we assume that the consumer remains resilient and continues to grow at the current pace (1.4% since 2017). Our analysis shows that investment would need to grow consistently at +4.3% on average per annum over the next 4 years, from its current -3.7% in 2024 (Figure 9).
This would require cyclical investment accelerating to 4.5% in 2025 and remaining at that pace over the next three years. The probability of this being achieved should be viewed in the context of cyclical investment having averaged -0.3% per annum since 2017 and -3.2% last year. Almost all cyclical investment is private-sector led and currently accounts for 72% of total investment, up from 40% in 1980. With South Africa either in or about to enter a downward phase of the business cycle, it is more likely that private sector investment continues to contract, at least over the next year.
Non-cyclical investment growth would need to average 4.6% per annum over the next 4 years. This would require a recovery from -5.2% per annum over the past decade and -5.0% in 2024. Such a reversal is unlikely, in part because public sector investment has been in decline since 2015. Government investment spending is crowded out by interest payments (R425bn per annum or 21% of revenue) and constrained by the need for a bloated social wage to curb potential unrest amidst high unemployment, which makes it difficult to reign in consumption expenditure. The latest budget has introduced a new, off-balance sheet, hybrid funding model which relies on the private sector to do the heavy lifting with respect to investment.
Figure 9: Investment would need to grow at 4.3% p.a. out to 2028 for GDP to average 2.0%
Source: SARB, Matrix
Monetary and fiscal policy implications
Our analysis of cyclical GDP shows that the amplitude of the growth cycle has narrowed over time and is currently very shallow with respect to both consumption (Figure 10) and investment (Figure 3). Monetary policy can impact the growth cycle but has limited control over structural growth and in this context the shallow growth cycle reduces the trade-off between inflation and growth, such that the “cost” of higher interest rates is reduced relative to the “benefit” of lower inflation, resulting in an asymmetric monetary policy reaction function. What could be given more consideration by monetary policy is that, although shallow, a cycle does exist, and it is currently indicating that SA is in recession.
National Treasury’s fueling of consumption versus investment has implications for inflation and monetary policy because consumption drives demand while less productive capacity narrows the output gap. We would argue that the strength of the consumer makes the MPC more hesitant to cut.
From a fiscal perspective, slower growth has implications for tax revenue. Under a scenario in which real GDP growth averages 1.0% over the MTEF, all else equal, this will reduce tax revenue by R14.5bn, R30bn and R51bn out to 2027/28.
Figure 10: Narrow gap between growth in Matrix Cyclical and Structural Consumption indices indicates a shallow business cycle
*Blue bars indicate recessionary periods
Source: SARB, Matrix
We suggest that GDP growth forecasts need to consider that SA is likely to be in or close to a recession and an investment-led recovery is currently unlikely. At the same time, consumption is already outperforming and may come under pressure as fiscal stimulus is crowded out by debt service costs, and tax increases are imposed to counter the effects of slower GDP growth on revenue. Investment to sustain growth above 1.0% requires a regeneration of confidence facilitated by a more stable political landscape and better governance. Micro-economic reforms are needed, particularly with respect to ensuring reliable and affordable delivery of water, electricity and other basic services as well as transport and port logistics.
