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, rising a mere half a percent since the first quarter of 2024. The expenditure side of the economy (GDE) has consistently fared as poorly, up by 1.5% over the same period, 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. This is down by 1.3%, while a bigger drag on growth has been capital expenditure by firms and the government, now 3.2% lower than it was in early 2024. This is a reality that seems to resonate everywhere, except at the Reserve Bank, but more on this a little later.
National income flows, 2024-2025 (2024 = 100)
Source: SA Reserve Bank, Investec Wealth & Investment International (quarterly seasonally adjusted data at constant prices), 16/07/2025
The lack of demand is reflected in the money supply (bank deposits) and the 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. This lack of demand for money and credit, we believe, can be explained by their high real costs.
Money supply and bank credit, adjusted for inflation (2024=100)
Source: SA Reserve Bank, Investec Wealth & Investment International, 16/07/2025
Inflation down, along with bond market anxiety
One notable improvement in financial conditions has been the decline in the inflation rate to below 3%. Perhaps even more worthy of notice is the decline in longer-term interest rates since April, when the anxieties about the Budget and the survival of the government of national unity (GNU) were at their most intense. The one, five and 10-year bond yields are off by 25 (a quarter of a percentage point), 89 and 128 basis points, respectively, with the bigger moves at the long end. These moves are largely because expectations of inflation have been revised significantly 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 government bonds have declined impressively from 5.14% in April 2025 to 3.75% this week, perhaps because the Reserve Bank has committed itself to a 3% inflation target. More likely, though, it’s because inflation itself has receded so sharply. Inflation leads and expected inflation follows, not the other way round.
However, the South African-specific risks explicit in bond yields, while half a percentage point lower than they were in April, are still elevated, now just under 2% for five-year government bonds. The fully inflation-protected 10-year bond yield remains above a real 5%. This implies a high real cost of capital for businesses that suffocates capital expenditure, especially when demand for the goods and services they produce remains depressed. Moreover, short-term borrowing costs are not expected to decline by more than 25 basis points (a quarter of a percentage point) over the next 12 months.
Inflation is down because demand for credit to buy is repressed and because the rand has maintained its strength against most currencies. In line with the bond market, the rand has strengthened significantly since April this year, for GNU-related reasons. It’s noticeable that the rand has weakened against the Chinese yuan (our largest trading partner) at no more than an average of about 1% a year since January 2021. This is one reason why Chinese motor cars are as cheap as they are (despite tariffs).
The rand vs the US dollar, Australian dollar and the Chinese yuan. (2025 = 100)
Source: Bloomberg, Investec Wealth & Investment International, 16/07/2025
Real rates, expected inflation and the SA risk premium
Source: Bloomberg, Investec Wealth & Investment International, 16/07/2025
Welcome cheer from the stock market
The stock market has, nevertheless, brought some welcome cheer. The JSE All Share Index has returned a whopping 18% for the year to end June. This run has everything to do with precious metals, namely platinum and gold. On the other hand, the South African economy plays on the JSE reveal the dismal reality of a stagnant economy. The return on my constructed index, market value weighted, of South African plays, which includes the slow-growth-defying Clicks and Capitec, is down by 7% this year.
Growth can improve with governance and supply-side reforms and if there is less South African risk. This includes reforms that can help to get more gold and other minerals legitimately out of the ground. But faster growth needs the essential accompaniment of a more sympathetic monetary policy. That would help reduce South African risk, sustain a stronger rand and lead to less inflation. Inflation of 3% is possible without squeezing further life and growth out of the demand side of the economy.
Total returns from the different SA asset classes (January 2025 = 100)
Source: Bloomberg, Investec Wealth & Investment International, 16/07/2025
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