We recently discussed what the South African economy would have looked like had economic growth been in line with emerging market peers, at 4.5% since 2010. We showed that nominal GDP would have been around R11.5 trillion, compared to the current level of R7.4 trillion.
In that scenario, National Treasury (the fiscus) would have been able to collect around a cumulative R5 trillion more in taxes, which would have gone some way in funding the delivery of services and lowering the debt-to-GDP ratio.
A fundamentally stronger fiscal war chest would have played a significant role in uplifting the lives of South Africans.
In this report, we look into some of the underlying drivers of economic growth and how those can play a meaningful role in driving broader economic activity and increasing levels of employment.
Our fundamental proposition is that South Africa needs to get “back to business,” and by that, we mean get back to the basics of business confidence. We are reminded of the words of South African Reserve Bank (SARB) Governor Lesetja Kganyago in 2019 when he said, “Restoring confidence is the cheapest form of stimulus.”
Table 1: Correlation matrix between various economic indicators between 1994 and 2024
Source: Investec Wealth & Investment, Bloomberg, StatsSA (24-Jun-25)
We start by looking back at the correlation between business confidence and various economic indicators since 1994. The numbers show a close correlation between business confidence and economic outcomes (e.g. the average real GDP growth of above 4% during President Thabo Mbeki’s second term coincided with record levels of business confidence), and in turn improved employment outcomes (the unemployment rate fell from 28% in 2004 to 21% in 2008).
We should mention that it’s not a one-way street: business confidence is both a driver and a result of GDP growth. The key is that business confidence should be the main focus of the current government when solving for economic and employment growth, in turn solving for the poverty, unemployment and inequality problem in South Africa.
There are internal factors that drive business confidence that are within the control of the state. This includes economic policy that supports business optimism. Policy formation processes must have business confidence at the centre. This includes, but is not limited to:
- The constitutional obligation to execute across the three arms of state (executive, legislative, judicial)
- The effective delivery of services across all spheres of government (local, provincial and national)
- Structural reform and network industry enablement
- Reduced red tape (i.e. lower regulatory burden) for businesses to operate; and
- Significantly higher investment in education and technological advancement.
Economic policy that negatively influences and impedes the ability of businesses to make optimal capital allocation decisions (interest rates, fiscal spending, human capital enablement, etc) hurts business confidence and the relative ability to invest.
Policies should prioritise an investor-friendly environment as a mechanism to increase foreign investment and improve employment outcomes. This includes tax policy and the reframing of other economic policies, such as Equity Equivalent Investment Programmes, prioritising social upliftment, education and entrepreneurship.
Chart 1: SA monetary policy dynamics
Date sampled: 12/06/2025
Source: Investec Wealth & Investment, Bloomberg
First, let’s consider the influences of monetary and fiscal policy. Lately, we have seen negative monetary and fiscal policy impulses: National Treasury has adopted a conservative and austere fiscal policy path, while the South African Reserve Bank (SARB) has kept interest rates restrictive, despite the low inflation environment (Chart 1).
Austerity implies less flexibility to fund service delivery through debt, while the debt-to-GDP ratio has ramped up over the last few years, there has not been a matching increase in growth – i.e., a weak fiscal multiplier. Conservatism in that context is justified.
An expansive fiscal policy requires an optimal allocation of resources, which leads to higher returns on capital invested and results in higher economic growth (i.e., a strong fiscal multiplier).
Under prevailing circumstances, both approaches can support broader long-term macroeconomic stability. Other levers of government should be used to counterbalance these forces, such as better economic policy decisions, improved control of administered prices (in this way influencing inflation outcomes, and thereby inflation expectations and monetary policy) and improved productive capacity at key state-owned enterprises (SOEs). This would lead to a lower risk premium on South African assets.
The government can borrow at more favourable interest rates and fund service delivery on the one hand, while on the other hand, it can reduce the costs of doing business and ultimately boost business confidence.
Chart 2: Bureau for Economic Research SA Business Confidence Index
Date sampled: 24/06/2025
Source: Investec Wealth & Investment, Bloomberg
We have recently seen stagnation in business confidence (as measured by the Stellenbosch University Bureau for Economic Research (BER) Business Confidence Index) following a sustained upward trend in 2024.
The upward trend in business confidence was among the underlying reasons for the robust growth expectations towards the tail-end of last year, but the economy is now expected to grow somewhere between 1% and 1.5% in 2025, and only gradually trend towards 2% over the coming years.
Growth of below 2% is insufficient to solve for unemployment, and similarly negative for government tax revenues. The latest BER business confidence print came out at 40 points, down from 44 points previously, which is cause for some concern.
Chart 3: SOE performance index
Date sampled: 16/05/2025
Source: Investec Wealth & Investment, Stats SA, ESKOM, Transnet
The stagnation in business confidence has coincided with a stagnation in the performance of our SOEs (chart 3), namely Eskom (proxied by the Energy Availability Factor) and Transnet (proxied by the number of containers handled at our ports and tonnage moved on our railways).
Even though there has been a stagnation in performance, it is worth highlighting that the performance of SOEs is significantly above the trough levels seen in 2023.
Chart 4: SOE performance and business confidence
Date sampled: 16/05/2025
Source: Investec Wealth & Investment, Bloomberg, ESKOM, Transnet, Stats SA
The importance of the performance of our SOEs in business confidence is captured in Chart 4, which shows that since the pandemic, there has been a close correlation between SOE performance and business confidence. It thus makes sense that for business confidence to continue to improve, SOE performance must improve.
This is particularly important when you look at the link between business confidence and industrial metals prices in the correlation matrix in Table 1. For example, South Africa benefitted during the post-pandemic economic recovery from rising industrial metals prices. This resulted in meaningful fiscal benefits, with a R200bn windfall in extra tax revenues.
Despite higher industrial prices of late, South Africa is missing out due to challenges in logistics. It is not just about the movement of industrial metals, but also about moving the broader basket of goods.
Chart 5: SA GDP growth and exports
Date sampled: 20/06/2025
Source: Investec Wealth & Investment, World Bank
To further illustrate the point, we look at the relationship between GDP growth and exports. Typically, more robust exports coincide with periods of higher GDP growth. Therefore, it remains critical that the government has a magnified focus on energy and logistics constraints to solve for our export potential and enhance growth outcomes.
The reindustrialisation of the SA economy should be underpinned by a focus on these network industries. The country should, in essence, ensure that energy and logistics operate at higher capacity levels.
Chart 6: SA commodity export price index ($)
Date sampled: 12/06/2025
Source: Investec Wealth & Investment, Bloomberg
Chart 6 again illustrates that South Africa is losing a unique opportunity to take advantage of increased commodity prices. The combination of volume and price drives income, while higher volumes can provide a cushion for periods of downtrending prices.
Table 2: GDP and exports in SA
Date sampled: 20/06/2025
Source: Investec Wealth & Investment, World Bank, Bloomberg
While progress is being made in terms of structural reform, the year-on-year change in exports (Table 2 above) should ideally be above 20% to meaningfully contribute towards better GDP growth outcomes.
Chart 7: Unemployment and GDP growth
Date sampled: 20/06/2025
Source: Investec Wealth & Investment, World Bank
GDP growth is essential for the reduction of unemployment.
Chart 8: Business confidence and gross fixed capital formation
Date sampled: 06/03/2025
Source: Investec Wealth & Investment, World Bank
Finally, business confidence tends to be linked to gross fixed capital formation (investment). Investment is important, and the environment ought to be conducive for higher levels of both local and foreign direct investment.
Chart 9: Gross fixed capital formation in SA
Date sampled: 06/05/2025
Source: Investec Wealth & Investment, IMF
South Africa has had relatively low gross fixed capital formation since the 1980s and is the lowest among the sample of countries in the chart above. There is also a stark dislocation between gross fixed capital formation in South Africa and that of our emerging market peers.
Again, the policy formation perspective should be supportive of investment, and one of the critical enablers will be giving businesses the freedom to operate.
Chart 10: SA potential unemployment rate
Date sampled: 20/06/2025
Source: Investec Wealth & Investment, World Bank
By our estimates, given the link between unemployment and GDP growth, the unemployment rate would have been materially lower had growth been about 4.5% a year since 2010.
Forecasting the unemployment rate is inherently difficult; however, with GDP growth of above 2%, this should meaningfully improve employment outcomes.
Chart 11: GDP per capita under different growth scenarios
Date sampled: 24/06/2025
Source: Investec Wealth & Investment, World Bank
If we look at GDP per capita on a purchasing power parity (PPP) adjusted basis, the need for growth becomes more obvious. For South Africa to reach the global average GDP per capita within the next 10 years, GDP per capita growth in SA has to be between 8% and 8.5% (between 3% and 5% real growth, depending on prevailing inflation).
This is above the middle-income average growth rate of 5.9% since 1991 and almost double the global average growth rate of 4.4%. Should we continue on this average growth trajectory, the dislocation between South Africa and the rest of the world will likely worsen. The fundamental point is that growth will provide a broader societal uplift (on a GDP per capita basis).
Chart 12: SA valuations relative to select equity markets
Date sampled: 12/06/2025
Source: Investec Wealth & Investment, Bloomberg
Finally, we consider the wealth effects beyond GDP per capita. The JSE is trading at around a 10% discount to its historic mean forward price-earnings ratio. A reversion back to the mean suggests that the wealth of households exposed to equity markets would increase by 10%, or more, if South African equities start to trade at a premium.
The translation of wealth effects is that the higher household wealth, the higher the ability for households to consume and contribute towards economic activity. Therefore, solving the economic growth problem would benefit high-income and low-income households alike.
The beneficiaries of broad-based black economic empowerment should similarly benefit from the higher valuations placed on assets in South Africa in general.
In summary:
- Economic growth, in the main, will be driven by business confidence.
- One of the main enablers of business confidence is the likely improvement at Eskom and Transnet.
- Improving business confidence can lead to increased investment (both local and foreign direct investment). Fixed investment can catalyse the economy.
- Employment outcomes will be materially better in a high-growth environment. Rising employment should lead to more robust spending (i.e., consumer demand) and underpin GDP growth, in a more impactful way than spending from social grants.
- Exports are an important feature of the South African economy, particularly in an environment of higher industrial metal prices.
- Better economic growth can lead to improved GDP per capita as well as improved stock market performance. This growth can benefit both higher-income and lower-income households.
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