By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Financial conditions ease, but tariff pressures linger for South Africa
In its July World Economic Outlook (WEO), the International Monetary Fund (IMF) marginally revised its global growth outlook up to 3.0% from 2.8% (in April's WEO) for 2025 and to 3.1% from 3.0% for 2026. The revisions underscore robust front-loading in international trade in anticipation of higher tariffs, a lower worldwide effective tariff rate than assumed in the April WEO, and an improvement in global financial conditions. Since "Liberation Day" in April, several economies have concluded trade deals or agreements with the United States (US), settling at lower tariffs than initially proposed. Notably, Japan is now facing a 15% tariff rate, down from the initial 30%, and has made concessions to invest $550 billion in the US. Europe has similarly settled at 15% and committed to investing $600 billion in the US. Meanwhile, an extended trade truce is in place between China and the US after the two economies reduced their steep retaliatory tariffs by 115%.
However, South Africa (SA) has yet to finalise a trade deal with the US and is currently subject to a 30% reciprocal tariff rate. Vehicle and auto-part exports are facing a 25% tariff, while critical minerals (largely precious metals) remain exempt. Interestingly, while the global economy navigates the tariff storm, financial conditions have improved, supporting broader economic activity.
This holds true for SA as well, where our in-house financial conditions index - a broader measure of financial conditions - suggests a gradual transition from moderately restrictive territory to a modestly easier terrain. In June, the financial conditions index measured 0.13, up from -0.25 in May and -0.46 in April (the month of "Liberation Day"), largely reflecting a strong gain in the inflation-adjusted JSE All Share Index, an acceleration in real M3 money supply, and an improvement in SA's Credit Default Swap (CDS) spread. There were also improvements in Generalized Autoregressive Conditional Heteroskedasticity (GARCH)-measured volatility across the currency and stock markets, and the rand appreciated on both a bilateral and real trade-weighted basis. Credit conditions, particularly for corporates, remained favourable, further supporting overall financial conditions.
On a quarterly basis, financial conditions were still moderately restrictive in 2Q25 relative to 1Q25, suggesting modest potential for economic recovery. We currently estimate that quarterly GDP growth lifted marginally to 0.3% in 2Q25 from 0.1% in the prior quarter - with the final estimate to be published once the full set of 2Q25 high-frequency data is available.
Overall, growth is expected to average around 1.0% this year, up from 0.5% in 2024 and 0.8% in 2023, and lifting to 1.4% in 2026 and 1.9% in 2027. The improvement in growth will be supported by an ongoing recovery in consumer spending, structural reforms, and easing financial conditions. This forecast incorporates the impact of tariffs, with SA expected to lose its merchandise trade surplus with the US (currently 0.5% of GDP in 2024), though it may be able to reroute some of its products to other markets. With the South African Reserve Bank (SARB) now using 3% as its inflation anchor, and assuming success over the next two-to-three years, which historical precedent suggests is achievable, there should be ample room for further interest rate reductions in the outer years. This would give further impetus to broader financial conditions. However, better alignment between fiscal and monetary authorities will be critical in supporting the SARB's preferred journey toward structurally lower inflation.
Week in review
Gross foreign exchange reserves reached a new record of $69.2 billion in July, up from $68.4 billion in June. The increase was mainly due to higher gold and foreign currency reserves.
Electricity production decreased by 1.3% y/y in June, down from 2.3% growth in May. On a seasonally adjusted basis, electricity production fell by 1.4% m/m, following a 1.5% increase in May. Over 2Q25, electricity production recorded mild growth of 0.4%, suggesting that the sector contributed positively to 2Q25 GDP growth.
Week ahead
Data on manufacturing production for June will be released on Monday. In May, manufacturing production increased by 0.5% y/y after contracting by 6.4% in April. Seasonally adjusted output rose by 2.0% m/m, increasing the momentum from 1.7% in April. The upcoming data will give a clear indication of how this sector contributed to 2Q25 GDP growth.
Data on mining production for June will be released on Tuesday. Mining output increased by 0.2% y/y in May following a 7.7% decline in April. Seasonally adjusted mining output rose by 3.7% m/m, up from 0% in the previous month.
Also on Tuesday, the Quarterly Labour Force Survey (QLFS) for 2Q25 will be released. The QLFS reflected a decrease of 290,575 q/q in total employment during 1Q25, following an increase of 131,669 q/q in the previous quarter. However, compared to the same quarter last year, employment improved by 42,517 to 16,787,267. The level of unemployment increased by 236,731 q/q (1,789 y/y), bringing the total number of unemployed individuals to 8,227,678. As a result, the official unemployment rate increased by 1.0-percentage point (ppt) to 32.9%.
Data on retail sales for June will be released on Wednesday. In May retail sales rose by 4.2% y/y after increasing by 5.2% in April. On a monthly basis, retail volumes recorded 0.1% following 1.1% growth in April. An uplift in consumer spending on retail goods in June will be supportive to GDP growth.
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