South Africa's economy faces an uphill battle as growth stagnates

IOL News

05-06-2025

South Africa's economic growth has plummeted to just 0.1% in the first quarter of 2025, following a revised 0.4% gain in late 2024, raising concerns about the country's economic future amid revised forecasts from the South African Reserve Bank
Image: Leon Muller Independent Newspapers
South Africa's economy remains under significant strain, with gross domestic product (GDP) growth lagging behind population increases over the past decade. According to the OECD Economic Survey: South Africa 2025, economic output grew by a mere 0.7% annually in the past ten years.
This slow pace resulted in stagnating or declining GDP per capita, further deepening the country's entrenched unemployment and inequality.
The OECD warned that 'economic growth has averaged only 0.7% per year over the past decade, below that of the population,' a key factor in the country's deteriorating living standards.
Public debt, which stood at 31.5% of GDP in 2010, is projected to balloon to 77% by 2025, increasing debt servicing costs and limiting fiscal space for much-needed public investment. Electricity and infrastructure bottlenecks: dragging growth down
One of the central themes in the OECD's report is the impact of structural constraints on productivity.
'Persistent insufficient access to electricity, and rail and port bottlenecks have weighed on activity, investment, exports and living standards over recent years,' the report noted.
In 2023 alone, electricity shortages shaved 1.5 percentage points off GDP growth.
Though 2024 has seen improvements in power availability due to reforms and increased independent renewable energy generation, supply remains unreliable.
The OECD stressed the urgent need to 'accelerate renewable electricity generation, expand the transmission grid, and redefine the role of municipalities and Eskom in electricity distribution'. Reform momentum is building - but not fast enough
While the government's Operation Vulindlela programme has shown promising results, with 74% of Phase 1 reforms completed or on track, the report made it clear that the pace and scope of reforms need to intensify.
The next phase aims to address local government inefficiencies, spatial inequality, and digital transformation.
Lilas Demmou and Nikki Kergozou, the lead authors of the report, said, 'It is vital to maintain the momentum of ongoing reforms to unlock South Africa's economic potential and promote inclusive growth.'
The authors added that a reliable electricity sector, more competitive markets, and increased private investment are critical for sustained growth. Fiscal policy: walking a tightrope
South Africa's fiscal picture remains precarious.
The 2025 fiscal deficit is forecasted at 6.6% of GDP.
Elevated debt servicing costs, projected at 5.2% of GDP are limiting the government's ability to fund much-needed social spending and public investment, the OECD report stated.
To reverse this trend, the OECD called for 'a continued consolidation strategy' through stricter spending controls, enhanced tax compliance, and reforms to state-owned enterprises (SOEs).
The report suggested expanding the tax base by reducing personal income tax expenditures, raising VAT, and improving municipal property tax collection.
The authors argued for protecting infrastructure and social spending while prioritising fiscal discipline.
'Boost public investment, especially in core infrastructure such as electricity, water, and rail,' was one of the central recommendations.
Employment crisis: a key drag on growth
South Africa's labour market performance is among the worst globally.
The employment rate stands at just 37.4%, while the unemployment rate, particularly among the youth, remains alarmingly high.
The OECD noted that 'the unemployment rates for young people, at 60%, and for women, at 34%, are notably higher than for the total population'.
The report outlined a multi-pronged strategy to boost employment: easing regulatory burdens on small businesses, simplifying licensing, and expanding vocational education.
Urban planning reforms are also essential, as long and costly commutes exclude many from job opportunities.
'Promoting densification and reducing transport times and costs is vital to connect South Africans with jobs, calling for housing near public transport and development corridors, promoting rental housing near city centres and reforming restrictive building regulations," the report revealed.
Inflation target and monetary policy
On the monetary side, inflation has moderated, allowing the South African Reserve Bank (Sarb) to ease interest rates in late 2024.
However, the report suggested reconsidering the inflation targeting framework.
South Africa's current 3–6% band is broader and higher than those of its peers.
The OECD recommended narrowing the band to better anchor inflation expectations and enhance international competitiveness.
'Reducing the inflation target and its band could more closely align inflation with that of trading partners,' the OECD proposes, adding that such a change must be 'carefully timed, coordinated across government, and clearly communicated'.
Path Forward: Growth with Inclusion
To raise the country's potential growth rate beyond the current 1.2%, the OECD outlines a bold yet actionable roadmap: Accelerate infrastructure investment , especially in electricity, water, and logistics.
Widen the tax base to ensure fiscal sustainability.
Reform labour markets to boost job creation and formal employment.
Target inflation more precisely to support competitiveness.
Combat corruption and enhance SOE performance to rebuild public trust and attract investment.
Demmou and Kergozou said, 'Strengthening competition, reducing corruption, and boosting private-sector investment are key to enhancing economic dynamism, reducing unemployment and alleviating poverty'.