The real economy continues to make little progress, according to the latest national income estimates for the first quarter of 2025. Output (GDP) has stagnated, higher by a mere half of 1% since quarter one 2024.
The expenditure side of the economy (GDE) has consistently fared poorly, up 1.5% since then, helped to a small degree by a 3.1% increase in household consumption. Government consumption expenditure, which excludes the welfare grants in cash that find their way into household spending, has also been a drag on the economy — down 1.3% — while a bigger drag on growth has been capital expenditure by firms and the government that is now 3.2% lower than it was in early 2024. This baleful reality seems to resonate everywhere except at the Reserve Bank.
The lack of demand is easily explained by the money supply (bank deposits) and credit supplied by the banking system. In 2025 the money supply and supplies of bank credit and mortgages, adjusted for inflation, have been in retreat and are barely above levels of early 2024. Clearly the lack of demand for money and credit can be explained by their high real costs.
One notable improvement in financial conditions has been the decline in the annual inflation rate to below 3%. Perhaps even more worthy of notice is the decline in longer-term interest rates since April, when anxieties about the budget and the survival of the government of national unity (GNU) were at their most intense. The 10-, five- and one-year bond yields are off 128, 89 and 25 basis points (bps), respectively — truly big moves at the long end, largely because expectations of inflation in SA have been revised lower.
Inflation expectations are implicit in the differences in the yield on an inflation-exposed bond and its inflation-protected equivalent. These differences in nominal and real yields for five-year RSAs have declined impressively, from 5.14% in April to 3.75% this week, perhaps because the Bank has committed itself to a 3% inflation target but more likely because inflation itself has receded so sharply. Inflation leads and inflation expected follows — not the other way round as the Reserve Bank likes to contend.
However, the SA specific risks explicit in bond yields, while 50bps lower than they were in April, are still highly elevated, now just under 2% for five year RSAs. And the fully inflation protected RSA 10-year bond yield remains above a risk infused real 5%. This implies a high real cost of capital for SA businesses that suffocates capex spending, especially when demand for the goods and services they produce remains depressed and is expected to remain so — and when short-term borrowing costs are not expected to decline by more than 25bps over the next 12 months.
Inflation is down because demand for credit with which to buy is severely repressed, and because the rand has maintained its strength against most currencies. In line with the bond market, the rand has strengthened since April for GNU-related reasons. It is noticeable that the rand has weakened against the Chinese yuan (our largest trading partner) at no more than an average of about 1% per annum since January 2021, one reason Chinese motor cars are as cheap as they are (despite tariffs).
The stock market has nevertheless brought some welcome cheer. The JSE all share index has returned a whopping 18% this year. This run has everything to do with precious metals — platinum and gold in that order — though the performance the economy plays on the JSE reveals the dismal reality of a stagnant economy. The return on my constructed index, market value weighted, of SA plays that includes the slow growth defying Clicks and Capitec, is down 7% this year.
Growth can improve with governance and supply side reforms and less SA risk, including reforms that can get more gold and other minerals legitimately out of the ground. That is surely common cause. But faster growth needs the essential accompaniment of a more sympathetic monetary policy. That would reduce SA risk, sustain a stronger rand and lead to less inflation.
Three percent inflation is possible without squeezing further life and growth out of the demand side of the economy.
• Kantor is head of the research institute at Investec Wealth & Investment. He writes in his personal capacity.
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