War in Iran scuppers SA’s GDP forecasts

South Africa’s GDP growth quickened slightly in the final quarter of 2025 but overall growth for the year came in below the Treasury’s predictions, with turmoil in the Middle East also likely to throw this year’s forecast out the window.

But while finance minister Enoch Godongwana cannot be totally faulted for how some of the estimates he tabled in parliament last month are now in doubt, the latest GDP data underpins how South Africa’s failure to build up its industrial base makes it more vulnerable than its peers to global shocks, economists said.

The economy grew 0.4% in the last three months of the year compared with 0.3% in the previous quarter, driven mainly by growth in the consumptive sectors, data from Statistics South Africa showed on Tuesday.

Growth for the whole year also quickened to 1.1% from 0.5% in 2024, but undershot the Treasury’s estimate of 1.4%.

The finance industry was the largest positive contributor to the quarter’s growth number, increasing 1.4% and contributing 0.3 percentage points to the overall print, Statistics South Africa said. The trade industry was up 0.9%, contributing 0.1 percentage point, while the personal services industry rose 0.4%.

The manufacturing industry was, however, the biggest drag, shrinking 0.6% and accounting for negative 0.1 percentage points to the overall number.

The annual GDP increase for 2025 was primarily led by higher economic activities in finance, real estate and business services, agriculture, forestry and fishing, as well as trade, catering and accommodation.

The manufacturing, electricity, gas and water, and construction industries all contracted.

Downward revisions

A reason for the full-year disappointment was the downward revisions to growth numbers in the earlier quarters of 2025, Bureau for Economic Research analysts Lisette IJssel de Schepper and Shannon Bold noted, with third-quarter growth scaled back to 0.3% from 0.5%.

“As expected, the production side of the economy reflected relatively broad-based weakness. While not steep declines … half of the sectors contracted relative to [the third quarter] when all but electricity expanded slightly,” they said.

The war in the Middle East is likely to undo the fairly optimistic growth forecast for South Africa’s economy in 2026.

In his budget speech to parliament last month, Godongwana predicted it would expand by 1.6% and average 1.8% over the next three years before reaching 2% by 2028.

The forecast, however, came before the turmoil triggered by the US and Israel’s attacks on Iran, which have sent global oil prices soaring.

In its annual results on Tuesday, banking group Absa warned prolonged military action in that region could push energy prices even higher and lead to weaker domestic GDP growth. Absa had forecast domestic growth of 1.9% before the latest conflict in the Middle East broke out.

The underwhelming 2025 figure means that February’s budget deficit and debt-to-GDP forecasts are likely to deteriorate, Efficient Group chief economist Dawie Roodt told Business Day.

“With 1.1% GDP growth that means we’re probably going to see debt to GDP at 80% in the coming 2026/27 financial year … which also means that it’s unlikely that we’re going to see a further [credit rating] upgrade this year,” he said, referring to last year’s upgrade from S&P Global, the first one in several years.

“And on top of all of that we have this issue in the Middle East, which is likely to weigh on economic growth as well. We don’t know how bad it’s going to be because it’s still ongoing and the oil price is all over the place. But clearly there will be a shock to the system.”

Godongwana was more optimist about South Africa’s debt problem last month, predicting that it would stabilise at 78.9% of GDP in 2025-26 before declining to 77.3% in 2026-27 and further to 76.5% by 2028-29.

Inflation risk

If the oil price, which spiked above $100 a barrel this week on supply concerns linked to the conflict, persists at present high levels that also all but shuts the door on the South African Reserve Bank cutting interest rates this year as it could push inflation beyond the new 3% target.

“We have made good progress on inflation, but that’s at risk now. So definitely it feels like we’ve taken a step backwards,” Stanlib analyst Kevin Lings said.

South Africa’s persistently tepid growth, which the government has acknowledged is insufficient to slash its high unemployment rate of 31.4%, is largely due to the continued underperformance of the industrial sector, Lings said.

“If you break down just the fourth-quarter growth it’s very clear that the industrial base of South Africa remains under pressure. There were declines in mining activity, manufacturing, electricity, construction and transport,” Lings said.

“The growth that we’re getting is not the best type of growth. It needs to broaden out into other sectors of the economy and then we would be able to increase the vibrancy of the economy.

“We’ve got to keep developing infrastructure because there’s no doubt that parts of the mining industry, for example, are reluctant to expand if there isn’t a railway system or a port system. The manufacturing sector, to some extent, has some of the same problems — you throw in nervousness about water, [and] nervousness about electricity,” Lings said, suggesting deregulation as a prerequisite.

“A good example was when the government deregulated the energy sector; it allowed the private sector to produce renewable energy plants of a significant size and the private sector responded and some of that investment has been good. But you need that a lot more, in a lot of different areas.

“It’s not as if we’re not trying, we’re definitely trying to move in that direction, but if you look at this data, it’s telling us we’re not doing enough. We can’t become a successful economy on the back of just consumer spending and banking. We need the industrial base to play a much bigger role.”