International background and outlook

The world remained gripped by developments in US policy and the rapidly unfolding events in the Middle East. The US and China managed to strike a trade truce, while the US brokered a ceasefire in the unexpected missile war between Israel and Iran. The ceasefire came after the US took the unprecedented step of bombing Iran's nuclear facilities. So far, the US economy has held up reasonably well in the face of persistent uncertainty. However, survey data suggests that the tariff turmoil is starting to hurt consumers and businesses. Elsewhere, economic activity also lacked clear upward traction. Recent indicators point to sluggish growth in Europe and fading momentum in China. Part of the problem is that US policy is still evolving; President Trump is set to announce his edited, and potentially final, reciprocal tariffs on 9 July. The 'one, great, big, beautiful' budget bill was recently approved by the US House of Representatives and will provide tax relief and redirect spending away from social programmes towards the military and border control. While the net effects remain unclear, the new trade and fiscal policies will likely raise inflation and subdue growth. The rest of the world is unlikely to see significant price pressures but will face dwindling trade volumes and shifting supply chains, which is widely anticipated to lead to weaker global growth. In response, most central banks eased monetary policy further. The US Federal Reserve resisted fierce criticism from President Trump and left its policy rate unchanged, choosing to wait for greater clarity on the extent and impact of the policy changes. The continued uncertainty weighed on the US dollar, which slumped to a 3-year low. In sharp contrast, the global equity markets rebounded, recouping most of the losses of early April.

Domestic background and outlook

The economy held onto growth in early 2025, but the pace slowed and again proved underwhelming. The weakness in mining and manufacturing intensified, subduing the recovery in services. Confidence remained frail, undermined by visible and persistent tensions in the government of national unity, failing municipal services, regular disruptions to water supply, significant flood damage in several provinces, South Africa's strained diplomatic relations with the US, and the mounting risk of punishing US tariffs as the 90-day pause in reciprocal tariffs draws to an end and the future of AGOA hangs in the balance. Despite the turmoil, we still expect the economy to fare better in the quarters ahead. The momentum will come from consumer spending, underpinned by rising real incomes, subdued inflation, lower interest rates and continued withdrawals from contractional savings. Government consumption and capital expenditure could provide an added boost. However, renewed political instability, weaker global growth and sluggish commodity prices will likely undermine business confidence, hurt exports and discourage private sector fixed investment. We forecast GDP growth of 1% for 2025, followed by 1.6% in 2026. Inflation will rise gradually off a low base, but remain relatively contained, kept in check by a surprisingly resilient rand, much lower global oil prices, the gradual easing in domestic supply-side constraints, and limited demand pressure on prices. Given a relatively favourable inflation outlook, the South African Reserve Bank (SARB) reduced interest rates by a further 25 bps in June, bringing the cumulative decline to 100 bps. We see 1 more 25 bps cut in July, followed by a prolonged period of steady interest rates as SARB adjusts to a lower inflation target.