It is astounding that despite only a 0,6% growth in gross domestic product (GDP), in South African (SA), in 2024, the government believes the local economy can attain a 1,8% growth in GDP in the 2025/26 fiscal.
In place of looking to reduce government spending, the government intends to increase the spend despite economic headwinds. Over the last five years (2020/21 to 2024/25), South African government spending has increased by approximately 20% in nominal terms. If extended to 2025/26, the total increase wil be in the 29.5% increase in spending range.
Now, there are plans to go ahead with raising additional taxes via a 0,5% increase in VAT to meet this additional spend, while treasury has not adjusted tax brackets in two years, creating a super constrained consumer who is also facing another year of inflated increases in local municipal rates, and with electricity prices set to increase by over 11% in May.
GDP growth projections from analysts earlier this year, show expectations of GDP growth to range between 1%-1,4%, however these were taken prior to the implementation of additional Value Added Tax, (VAT) and the major impact of newly announced 30% import tariffs introduced by the US administration on South African imports, with the US currently SA’s second largest trading partner.
Tariffs an Taxes a Double Whammy
South Africa’s economy was already fragile before these tariffs, with growth forecasts barely outpacing population growth of 1.1–1.2%.
The validity of the current growth projections in light of these new developments—the U.S. tariffs and the additional 0.5% VAT increase effective May 1, 2025 is now highly questionable.
Both factors introduce significant downward pressure on the South African economy, and it’s reasonable to argue that pre-tariff forecasts (e.g., 1.5–1.7% GDP growth from KPMG, Deloitte, and the African Development Bank) are now outdated.
Let’s assess how these changes could push the recession likelihood past 50%.
Revisiting Growth Projections
The original forecasts assumed a stable external trade environment and no major domestic fiscal shocks beyond known constraints such as the electricity supply issues.
The U.S. tariffs—30% on goods and 25% on vehicles—directly threaten South African key exports of agriculture, automotive, minerals, potentially cutting GDP growth by 0.5–1%.
This alone could drag the projected 1.5–1.7% growth down to 0.5–1.2%, bringing the economy close to a state of stagnation.
If you now, add the 0.5% VAT increase (from 15% to 15.5%). This hike, will raise the cost of goods and services across the board. Consumer spending, which currently drives 70% of GDP, is already strained by high unemployment (33.2%) and stagnant wage growth.
National Treasury data suggests a 0.5% VAT increase could reduce household consumption by 0.3–0.5% in real terms, as disposable income shrinks. This could shave another 0.2–0.4% off GDP growth, reflecting the multiplier effect on an economy with low confidence (consumer confidence indices hovered around -15 in 2024).
Combining These impacts:
Tariffs Impact on GDP:-0.5 to -1% GDP growth.
VAT Hike Impact on GDP: -0.2 to -0.4% GDP growth.
Starting Projection on GDP Growth: 1.5–1.7% growth.
Revised Range for GDP Growth: 0.1–1% growth (best case) to -0.4% to +0.2% (worst case).
In the worst-case scenario, negative growth becomes likely for at least one quarter for the year, and if external or domestic shocks such as the rand depreciation, or increased power cuts compound this, a second negative quarter is likely resulting in what would be a technical recession to follow.
Recession Likelihood Reassessed
A recession probability exceeding 50% becomes plausible when growth falls below 0.5%, as this leaves little buffer against shocks.
Historical precedent supports this.
In 2019, South Africa slipped into recession with -0.1% growth over two quarters amid power cuts and policy uncertainty, with conditions not dissimilar to what the country is experiencing now. If the rand weakens further (it has already slipped to R19 to the dollar last week) and gets to a point of over R20 to the USD due to export losses, inflation could spike beyond 5%, prompting tighter monetary policy and further growth suppression.
The pre-tariff, pre-VAT forecasts are now without question no longer valid, with a revised GDP growth range of -0.4% to +1% reflecting the new reality, with the lower end signaling recession.
Given the dual shocks’ timing—tariffs already in effect and VAT hitting the economy next month, the SA economy could contract in Q2 and Q3, especially if global demand softens or load-shedding returns.
The net result is that a recession likelihood of 50–60% now seems reasonable, if not conservative, as the margin for error shrinks, making an economic downturn in South Africa more probable than not in 2025.
