Frederick Mitchell, Chief Economist | Aluma Capital (Pty) Ltd

March 3, 2025

Private Sector Credit Extension (PSCE)

January 2025

In January 2025, credit demand rose by 4.6%, exceeding expectations, although overall demand is still modest. Interest rate cuts are expected to enhance property and asset purchases as disposable incomes improve. As consumers increasingly rely on credit, overall demand for goods and fixed assets is poised to rise throughout 2025

In January 2025, demand for credit increased by 4.6%, up from 3.8% in December 2024 and surpassing market expectations of 3.0%. Although growth occurred across most subcategories, overall credit demand remains relatively low, despite recent interest rate cuts in November and January.

Mortgage advances and credit for fixed asset purchases are particularly sensitive to interest rates. The 25-basis point reductions implemented in both November 2024 and January 2025 have not yet significantly boosted property demand. Cumulatively, interest rates have been reduced by 150 basis points since September 2024, and the benefits of these lower rates are expected to become more evident later in 2025 as households and businesses show signs of recovery in disposable income.

In January, instalment credit sales rose slightly by 0.5%, following a 0.2% increase in December, with an annual growth of 5.9% for January 2025. Over the past two years, consumers have increasingly utilised short-term credit to manage financial pressures and rising living costs, reflected in a 4.4% increase in loans and advances in January 2025, following a 4.5% rise in December.

The growth in property and fixed asset purchases remains modest, with mortgage advances rising only 3.2% in January 2024. The slowdown in mortgage growth rates in late 2023 has been influenced by rising interest rates in the property sector. However, the recent 50-basis point rate cut in January may stimulate demand for properties and fixed assets as household income stabilises and increases in the coming months. As lower interest rates enhance consumers’ disposable income, overall demand for goods and fixed assets is likely to rise as we progress further into 2025.

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Budget Speech 2025

A Balancing Act

Much has happened in the last twelve months as well as the last month since the postponement of the February 2025’s budget. The big talking point and “bone of contention” was the mooted 2% increase in VAT. This increase was met with fierce resistance and made “balancing the budget” quite difficult, as the government has to decide between increasing taxes of cutting expenditures, leaving the Government of National Unity (GNU) between a “rock and a hard place” as it currently stands. The increase in VAT or other taxes sprout from the various expenditure items the government announced or want to implement which among other things include the National Health Insurance (NHI), a transformation fund and continuation of the Covid-19 relief grant and the possible introduction of a Basic Income Grant (BIG).

A View on Company Profits

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Company profitability is vital for investors and the government. In South Africa, the Gross Operating Surplus (GOS) indicates positive growth, with profits surpassing inflation in late 2024. Notable gains in the Agricultural sector (68.8%) contrast with modest growth in Mining and Personal Services, reflecting an optimistic economic outlook post-election.

A Sticky Affair

The South African Budget Speech Postponement

The Laffer Curve is an economic theory that describes the relationship between tax rates and tax revenue. Proposed by economist Arthur Laffer, the curve suggests that there is an optimal tax rate that maximizes government revenue without discouraging productivity, investment, and economic growth. The central idea is that increasing tax rates beyond a certain threshold can lead to diminishing returns; higher taxes may disincentivize work, entrepreneurship, and investment, ultimately reducing the overall tax base.

GDP, Economic Growth and Inflation

2024 Q4

The South African economy showed resilience with a 0.6% growth in the fourth quarter of 2024, despite challenges. Key sectors like Agriculture and Finance thrived, and improved consumer demand signals optimism for 2025. With continued market confidence and government reforms, there is potential for significant economic advancement ahead.