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IOL News
5 days ago
- Business
- IOL News
South Africa's economy stagnates with mere 0. 1% GDP growth in Q1, raising concerns
South Africa's economy narrowly escaped contraction in quarter one 2025, with gross domestic product (GDP) growing by a mere 0.1%, down from 0.4% in quarter four 2024, according to Statistics SA/ South Africa's economy narrowly escaped contraction in quarter one 2025, with gross domestic product (GDP) growing by a mere 0.1%, down from 0.4% in quarter four 2024, according to Statistics SA Experts were united in their concerned about stagnation in the economy. Maarten Ackerman, the chief Economist and Advisory Partner at Citadel, said the figures are "not something to celebrate,' as the country remains in a prolonged per capita recession, with full-year growth at just 0.8%. Agriculture, forestry and fishing industry increased by 15.8%, contributing 0.4 of a percentage point to the positive GDP growth. This was primarily due to increased economic activities reported for horticulture and animal products. The transport, storage and communication industry increased by 2.4%, contributing 0.2 of a percentage point. Increased economic activities were reported for land transport, air transport and transport support services. Stats SA said the finance, real estate and business services industry increased by 0.2%, contributing 0.1 of a percentage point. Increased economic activities were reported for retail trade, motor trade, accommodation and food and beverages. The manufacturing industry decreased by 2.0%, contributing -0.2 of a percentage point. Seven of the ten manufacturing divisions reported negative growth rates. The largest negative contributions were reported for the petroleum, chemical products, rubber and plastic products; food and beverages; and motor vehicles, parts and accessories and other transport equipment divisions. Mark Phillips, the head of Portfolio Management and Analytics at PPS Investments, warns that despite agriculture's impressive 15.8% surge, the economy is showing signs of serious strain. Manufacturing is down. Mining is struggling. Fixed investment has dropped. He said, big questions now loom: Is this a fragile win or a warning sign? How much longer can South Africa keep the lights on – economically and literally? This as global risks are intensifying, domestic investment is weakening, and the economy remains vulnerable to another round of load-shedding or global demand shocks. Professor Raymond Parsons, NWU Business School economist, said the disappointing GDP growth figure of 0.1% for the first quarter of 2025 comes as no surprise. 'Although adverse global developments earlier this year have also played a role, the weaker economic data was already apparent before then. For example, the Absa Purchasing Managers' Index for May, although showing some recent signs of business activity and demand improvement, has remained in contractionary territory for seven consecutive months.' Parsons said the key manufacturing sector is likely to continue to be a lagging one for now. 'This reality was already recently also presaged by several reduced growth forecasts for 2025, including by the National Treasury (1.9% to 1.4%) and the SARB (SA Reserve Bank)(1.7% to 1.2%). If present trends persist, the growth outlook for this year now seems likely to be only about 1%, possibly rising to about 1.5% in 2026. It is clear that the incipient economic recovery in SA is presently struggling to gain momentum and needs maximum support to strengthen the business cycle upturn," he said. Waldo Krugell, an economics professor at the North-West University (NWU), pointed to the fact economists were expecting weak GDP data as high frequency indicators like PMIs and monthly manufacturing and mining stats pointed to a slowdown. 'The fact that agriculture, which is a small part of GDP, is again such a swing factor, though to the positive side, shows that there is very little growth happening elsewhere. On the expenditure side it is households driving the little bit of growth that we see. They were spending on transport (those Q1 new vehicle sales showing up), food and beverages, restaurants and hotels, and health,' he said. Krugell added that what is really worrying is the contraction of investment spending. 'International uncertainty did play a role, but we did have exports contributing to growth in Q1. I think the loss of Government of National Unity (GNU) reform momentum played a bigger role.' Call for policy coordination Meanwhile, Dr Eliphas Ndou, an economist and author at Unisa's Department of Economics, said the weak economic growth rate points to an urgent need for policy coordination to raise economic growth. 'The weaker growth implies the economy will be creating jobs at a faster pace leading to persistently high unemployment rate, and also this means elevated gross loan debt to GDP ratio, which National Treasury should deal with through spending reductions. It is ideal that in such periods of elevated policy and trade uncertainty that slow economic growth to implement policies that raise economic agents' optimism,' Ndou said. Ndou added that the slowdown in consumption contributions from 0.7 in the last quarter of 2024 to 0.2 in the first quarter of 2025 is consistent with deterioration in FNB/BER consumer confidence index which declined from -6 index points to -20 index points over the same periods. Wandile Sihlobo, the chief economist at Agricultural Business Chamber of South Africa, highlighted that South Africa's agriculture sector is in recovery mode, although the recovery is uneven, as some subsectors, mainly livestock, are facing challenges that will become apparent later in the year. 'The data released this morning by Statistics South Africa shows that South Africa's agricultural gross value added expanded by 15.8% quarter-on-quarter (seasonally adjusted) in the first quarter of 2025. This expansion is primarily due to the improved performance of certain field crops and the horticulture subsectors,' he said. Sihlobo added that the better performance of these particular subsectors is expected to continue dominating the year. BUSINESS REPORT
The Citizen
24-04-2025
- Business
- The Citizen
Economists welcome scrapping of VAT increase
Scrapping the VAT increase will slightly affect inflation, but government will have to find the money elsewhere to balance the budget. Economists have welcomed the scrapping of the VAT increase but also warn about the fiscal implications. Frank Blackmore, lead economist at KPMG, says scrapping the VAT increase means that the economy is spared a general increase in prices due to the VAT increase. 'This means consumers will have marginally more money or disposable income to spend as they choose, which is a good thing given the cost-of-living pressures largely due to sub-optimal service delivery and price pressures from regulated prices are already a reality for most South Africans.' However, he points out that it also means that the estimated revenue of between R10 billion to R13.5 billion, depending on whether zero-rated items are considered or not, would now not be collected requiring cuts in expenditure elsewhere in the budget to make up for it. 'Hopefully, these expenditure cuts can be made to non-critical service delivery areas, such as public sector marketing, catering, travel and personal protection budgets, as well as reviewing the size of cabinet as opposed to public services such as health, education, safety and security.' ALSO READ: A R1 billion U-turn: Scrapping the VAT increase leaves no winners, just absolute chaos Reversal of VAT increase shows GNU works Maarten Ackerman, chief economist at Citadel says the good news about the reversing of the VAT increase is that it first of all shows that the Government of National Unity (GNU) survived this kind of gridlock. 'I think it is very important for South Africa that we could achieve that. It will probably make the GNU stronger going forward in terms of working together to find solutions for the country's money problems.' With the VAT increase out of the equation, what about inflation? Ackerman says it will be slightly positive for inflation, but even before the VAT increase was scrapped, the inflation data came out this week at 2.7%, screaming for a rate cut from the Reserve Bank. Farzana Botha, senior communications manager at Sanlam Risk and Savings, says Sanlam welcomes government's decision to withdraw the VAT increase and recognise it as a timely relief for consumers amid ongoing economic challenges. 'Maintaining the VAT rate at 15% helps preserve household purchasing power, especially for lower- and middle-income families who are most affected by cost-of-living pressures. This move supports consumer confidence and spending, which are vital for economic recovery and growth. 'However, we acknowledge the fiscal implications of this decision, including the anticipated revenue shortfall of approximately R75 billion over the medium term. It is crucial for the government to implement prudent expenditure adjustments to maintain fiscal stability.' ALSO READ: VAT U-turn: How businesses felt the brunt of political roulette Decision to scrap VAT increase was the right one under circumstances Prof Raymond Parsons, economist at the NWU Business School, says the decision not to increase VAT on 1 May is the right one in the current circumstances. 'After an intensive debate, an increase in VAT was eventually seen as unnecessary and economically and politically it also failed to command wide support. 'An unchanged VAT rate brings welcome relief and certainty to business and consumers and to that extent it is confidence-building. However, this does not mean that South Africa is fiscally out of the woods. Future risks to fiscal policy remain.' He says successfully managing the fiscal risks now depends on a credible fiscal strategy to balance the books being embodied in the third budget to be presented shortly. Parsons points out that the advantages of the delayed budget and the controversy that surrounded it are three-fold. 'They identified better options available to balance the budget on both its spending and tax sides will subject future budgets to a more intensive consultative process and again emphasised the urgent need for much higher economic growth. 'It is now even more necessary, especially given current global developments, for South Africa to speedily accelerate key structural reforms to expand the economy. Fiscal sustainability must be reinforced by stronger economic growth that enlarges the tax base and boosts tax revenues.' ALSO READ: Treasury reverses proposed VAT hike, will remain at 15% Reversing VAT increase good for economy and consumers Evádne Bronkhorst, senior manager for tax consulting at Forvis Mazars in South Africa, welcomed Treasury's decision to withdraw the proposed VAT increase. She believes this move, although it creates a R75 billion revenue shortfall over the medium term, is a step in the right direction for consumers and the broader economy. 'This decision helps to ease inflationary pressures and prevents additional strain on consumer spending, especially for low-income households.' However, she warns that the financial gap it creates will increase pressure on Sars to drive revenue collection through improved debt collection and compliance measures and by broadening the tax base technology. Bronkhorst also cautions that rolling back the already-implemented VAT changes will place a heavy administrative burden on small businesses. Many had already adjusted their systems and pricing and will now need to reverse those changes. 'While the reversal brings some short-term relief, it is not enough to truly stimulate the South African economy. We urgently need expenditure reallocation and fiscal accountability that leads to real, sustainable change.' ALSO READ: Where will the minister find the money to make up for scrapping the VAT increase? No more VAT increase good news, but not a solution Alan Mukoki, CEO of the South African Chamber of Commerce and Industry (SACCI), also welcomed the decision to scrap the VAT increase, but says while this is a positive move it is by no means a resolution of the bigger problem with South Africa's finances. 'We still have a serious problem with how to deal with the budget and in particular the deteriorating debt servicing costs to revenue. The situation is not sustainable and we appreciate the difficulty the minister of finance has faced in balancing his revenue and expenditure options. 'We do not underestimate the complexity of the problem. This is no longer about the political parties or GNU. This is South Africa's problem that will require all key stakeholders to spend more time looking for solutions instead of amplifying problems and differences.' SACCI was opposed to the VAT increase because it would make goods and services more expensive and this will contribute to the loss of business confidence and aggravate slow economic growth and unemployment. ALSO READ: Economic ramifications of VAT increase: higher inflation, lower GDP Not enough work went into decision for VAT increase 'We are not yet convinced that enough expert work has been undertaken to investigate and look at expenditure throughout the government service. Other than a budget being a budget, it should also serve as a management information tool that gives insight that leads to management action. 'Data and analytics will help us to get a grasp of what is really happening with expenses and at this time we are not clear on this aspect. To get the level of granularity required would need an external resource to undertake the work.' Mukoki points out that Treasury staff are engaged with their day to day work and may not be the appropriate resource in this case. 'This work should encompass all levels of government and not just national departments as local government actions have a significant impact on the economy. We need this work to be commissioned as a matter of urgency.'
