South Africa is poised for stronger growth in 2025, driven by increased spending and investment, according to analysts at Absa. However, strained relations with the US may affect the country’s economic outlook.

The country could experience a 2.1% expansion this year, analysts from the lender said on Tuesday, as reported by Bloomberg.

“Growth should be a lot better this year,” said Absa economist Miyelani Maluleke at a media roundtable. He noted that lower inflation and borrowing costs are boosting household incomes, while investment is expected to recover from the low levels of recent years. “Cyclical support factors and a stronger consumer environment are positive.”

South Africa’s economy has averaged less than 1% growth over the last decade, hindered by corruption and mismanagement at state-owned entities, which have caused severe infrastructure bottlenecks and frequent power outages.

Load-shedding, as the electricity blackouts are locally called, has decreased sharply over the last year. Additionally, the formation of a broad coalition government after the May elections initially raised confidence, although recent tensions have diminished this boost.

A consumer sentiment index dropped to -20 in the three months through March from -6 in the previous quarter, according to First National Bank, a subsidiary of FirstRand. This marks the lowest level since Q2 2023, with concerns about higher taxes and US relations cited as key factors.

The tension with the US escalated when president Donald Trump halted all federal funding to South Africa over unfounded claims about land expropriation.

The dispute has fuelled fears that South Africa could lose preferential access to the US market under the African Growth and Opportunity Act (AGOA), which is set to expire in September.

Absa estimates that excluding South Africa from AGOA would have a limited direct impact but could have more severe long-term consequences if other trade tariffs rise or foreign direct investment is negatively affected.

Domestically, the so-called government of national unity has faced challenges, particularly after its first budget was rejected by key coalition partners over a proposed increase in value-added tax (VAT). A subsequent revised budget scaled back the VAT hike, and negotiations are still ongoing.

While Absa maintains an optimistic growth outlook, risks remain, including the uncertainty surrounding relations with the US and domestic political tensions stemming from the budget.

“The big concerns are the uncertainty,” Maluleke commented.

PwC, a financial services firm, noted that if South Africa’s economy were growing at a healthier pace, the debates around VAT increases, the tax gap, and adjusting the SACU revenue sharing formula might become less critical.

South Africa’s real GDP grew by only 0.6% in 2024, slightly down from 0.7% in 2023, while the country’s population continues to grow at over 1% annually. As a result, real GDP per capita has been in decline for nearly a decade.

There is a close relationship between economic growth and tax revenue, with a long-term correlation of 1:1. If South Africa can manage its economic challenges, it could improve fiscal health.

One way South Africa could boost growth is by enhancing productivity. Key areas such as energy, logistics, and infrastructure are considered essential to accelerating the economy.

The Reserve Bank recently revised its growth forecast for South Africa in 2025 down slightly from 1.8% to 1.7%.

This adjustment follows concerns about the country’s persistent economic underperformance, impacted by Covid disruptions, red tape, poor investor sentiment, and inefficiencies in electricity and logistics.

The fourth quarter of last year saw some growth, primarily driven by the household sector, boosted by lower inflation and withdrawals from the two-pot pension system.

“We have now revised down our 2025 growth forecast slightly to 1.7%, while leaving the outer years unchanged. We attribute lower growth partly to subdued demand and partly to lingering supply-side fragilities,” said Reserve Bank Governor Lesetja Kganyago.

Despite pressure on the South African Reserve Bank (SARB) to cut interest rates to stimulate growth, some economists argue that only accelerated structural reforms will help South Africa reach the desired 3% growth target by 2027.