By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
Inflation expectations continue to soften, reflecting the 4.5% objective
The BER's 2Q25 inflation expectations survey showed average expectations across business, trade unions, and analysts slowing to 3.9% in 2025 from 4.4% previously. Expectations for 2026 sit at 4.3%, versus 4.6% previously, while 2027 expectations, which are aligned with the two-year monetary policy implementation horizon, are 4.5%, down from 4.7%. For the five-year-ahead horizon, expectations are 4.4%, down from 4.7% in 1Q25. This highlights the benefits of soft headline inflation and is in line with the current inflation objective of the South African Reserve Bank (SARB). However, a lowering of the inflation target will require inflation to remain benign in support of even slower inflation expectations.
But surveyed expectations take time to evolve
In 2017, the SARB shifted to the point-target of 4.5%, instead of the 3%-6% band, citing the operational requirements of the Quarterly Projection Model (QPM) as well as the benefit of allowing the 3%-6% range to instead become a buffer zone during times of stress. The process of anchoring average inflation expectations at 4.5% took about two years and was supported by lower core inflation as large-ticket items such as housing inflation experienced structural weakness. This process was reinforced by the pandemic-related inflation dip. As inflation picked up over 2021 to 2023, so did average expectations and they have once again taken about two years to recover from the end-2022 peak. While currently muted inflation will assist with containing average expectations, there are nuances that highlight varying pressures.
The devil is in the detail
Analyst expectations are more forward-looking and tend to pull average inflation expectations down. Over the 2025-2027 horizon, analysts expect inflation of 3.4%, 4.1% and 4.2%, respectively, while business expectations are 4.3%, 4.4% and 4.5%, respectively and trade union expectations are 4.0%, 4.3% and 4.7%, respectively. The five-year-ahead expectations are 4.0%, 4.5% and 4.7% for analysts, business and trade unions, respectively. While analysts can influence pricing behaviour, business and trade unions remain the primary price setters in the survey. The higher expectations of these agents, bar the impact of actual economic impediments, suggests that an upside inflation bias could be upheld. Relatedly, households maintain an elevated inflation outlook of 5.4% over the next year and 8.5% over the next five years, highlighting the impact of underlying inflationary pressures.
While average inflation is muted, some items in the basket remain structurally high
The household experience of inflation is determined by spending patterns. While lower-income households will be more affected by food, higher-income households will be more sensitive to transport and insurance costs. That said, higher household expectations reflect the nuances beyond headline inflation readings. This is a dynamic that will also affect how quickly the SARB is able to efficiently and sustainably achieve a lower inflation objective. High administered inflation may need to be compensated for by further non-admin core disinflation, which suggests less monetary policy easing. That said, the efficacy gains from a credible central bank and effective communication cannot be overlooked.
Week in review
The FNB/BER Civil Confidence Index fell for the third consecutive quarter, dropping to 41 in 2Q25 from 45 previously, indicating that nearly 60% of respondents are dissatisfied with current business conditions. This decline in sentiment occurred despite signs of improved construction activity and profitability, with employment also showing gains. However, concerns about future work—such as insufficient demand, fewer published tenders, delays in adjudication, and a lack of large infrastructure projects—likely dampened sentiment this quarter, as well as expectations for the next quarter.
Private Sector Credit Extension (PSCE) growth rose to 5.0% y/y in May, up from 4.6% y/y in April, largely driven by an acceleration in corporate credit growth, which jumped to 6.6% from 5.9%. Household credit growth remained weak at 3.1%, marginally higher than the 3.0% recorded in April. Within corporate credit, growth in general loans and advances rose to 9.0% from 7.4%, supported by vehicle asset finance (up from 5.0% to 5.2%) and real estate finance (from 6.2% to 6.3%). In the household segment, general loans and advances and overdrafts remained in contractionary territory, while mortgage advance growth was marginally lower at 2.2% from 2.3% in the prior month. Growth in other household credit categories remained above inflation, with instalment sales credit rising to 6.7% from 6.2%, and credit cards at a slightly lower, albeit still robust, 8.2% from 8.5% in the previous month.
The trade balance recorded a surplus of R21.6 billion in May, reflecting an improvement from a downwardly revised surplus of R13.0 billion in April (previously R14.1 billion). This was driven by a 6.3% m/m increase in exports to R175.7 billion, supported by higher exports of gold, platinum group metals, and citrus fruits. Meanwhile, imports rose by only 1.2% to R154.1 billion, largely due to increased crude oil imports. Year-to-date, the trade balance reflects a surplus of R60.3 billion, slightly below the R63.9 billion recorded over the same period last year. Nonetheless, this remains consistent with our constructive outlook for the current account deficit.
The Manufacturing PMI rose by 5.4 points to 48.5 in June, marking the highest monthly increase since September 2024, though it remained in contractionary territory for the eighth consecutive month. Encouragingly, new sales orders surged by 7.8 points, driven mainly by domestic demand, while export volumes stayed low. Despite stronger demand, production declined slightly, and supplier delivery times lengthened, likely due to increased activity rather than supply issues. Employment saw a notable rise, reaching its highest level since March 2024, though sustained growth is needed to confirm a positive trend. Input costs eased as the purchasing price index fell, aided by a stronger rand and lower diesel prices. Business expectations for the next six months held steady at 62.5, supported by easing geopolitical tensions and stable global trade conditions.
Total new vehicle sales rose by 18.7% y/y in June to 47 294 units, following a 21.7% increase in May. This was driven by the continued robust performance in new passenger car sales, which grew by 21.7% to 32 570 units. Meanwhile, new commercial vehicle sales rose by 12.5% to 14 724 units. Within the commercial segment, light commercial vehicle sales increased by 14.9%, medium commercial vehicles by 24.7%, and heavy commercial vehicles by 40.7%. However, extra-heavy commercial vehicles continued to weaken, declining by 12.3%, while bus sales fell sharply by 43.5%. Year-to-date, total new vehicle sales are up by 13.7%, compared to a 7.0% decline over the same period last year, supported by a sustained and broad-based recovery in both consumer and fleet demand.
Electricity production increased by 2.3% y/y in May, accelerating from a 0.1% rise in April. On a seasonally adjusted basis, electricity production grew by 1.5% m/m, following a 0.2% increase in April. Over the three months to May, electricity production recorded a mild contraction of 0.1%, indicating that momentum will need to be sustained in June for the sector to contribute positively to 2Q25 GDP growth.
Week ahead
On Monday, data on South Africa's foreign exchange reserves for June will be released. SA's gross foreign exchange reserves lifted to $68.1 billion in May, up from $67.6 billion in April. The increase in foreign reserves and the international liquidity position was once again due to an increase in gold reserves and there were also market activity and valuation gains. These were countered by foreign currency payments made on behalf of government.
On Thursday, data on manufacturing production for May will be released. Manufacturing output (not seasonally adjusted) declined sharply by 6.3% y/y in April, following a 1.2% contraction in March. Seasonally adjusted output rose by 1.9% m/m, though this fell short of fully reversing the 2.5% monthly decline recorded in March. Nonetheless, this marks a moderately better start to 2Q25, although the persistent annual decline underscores ongoing unfavourable operating conditions and is consistent with our assessment of downside risks to the near-term economic growth outlook.
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