A larger-than-expected negative output gap in South Africa’s economy is set to keep inflation low and is creating a strong case for the central bank to implement interest rate cuts to stimulate a decade of stagnant growth.
Key Points:
- Widening Output Gap: South Africa’s economy is operating significantly below its potential, with a negative output gap believed to be much larger than previously assumed.
- Inflation Tamed: This economic slack is acting as a powerful brake on price pressures, with analysts projecting the gap will keep inflation pinned down at a low of around 3%.
- Rate Cuts on the Horizon: The low-inflation environment gives the South African Reserve Bank (SARB) a clear runway to cut interest rates, potentially stimulating investment and growth.
- Decade of Stagnation: The current situation is the result of a decade of anemic performance, with the economy averaging a mere 0.7% GDP growth per year.
JOHANNESBURG – A gaping chasm has opened up in the heart of the South African economy. It isn’t a physical fissure, but an economic one: a vast and growing ‘output gap’ that signals a nation running far below its full potential. This isn’t just a grim statistic for economists to debate; it is a stark reality of unused resources, shuttered factory doors, and persistent unemployment. Now, this very weakness is poised to force the hand of the nation’s central bank, creating an undeniable case for interest rate cuts that could jolt the stagnant economy back to life.
For over a decade, South Africa has been treading water. According to the World Bank, the country’s economy has been profoundly ‘muted,’ clocking an average GDP growth of just 0.7% annually for the last ten years. To put that figure in stark relief, the International Monetary Fund (IMF) noted in a recent consultation that a fellow BRICS nation, India, was seeing robust growth of 6% in the first half of its 2024/25 fiscal year. The contrast is a brutal illustration of South Africa’s struggle to gain momentum.
The Great Economic Divide: Unpacking the Output Gap
At the core of this economic malaise is the negative output gap. In simple terms, this is the difference between what an economy *could* be producing if all its resources—labour, capital, and technology—were fully utilized, and what it *is* actually producing. A negative gap, like the one plaguing South Africa, signifies ‘spare capacity.’ It means there are workers who want jobs but can’t find them, and machinery sitting idle that could be producing goods. This isn’t a theoretical concept; it’s the tangible result of prolonged underperformance.
The crucial development, as highlighted in recent analyses, is that this gap is now believed to be significantly larger than widely assumed. This indicates that the economic engine is sputtering far more than official dashboards might suggest. While the precise size of the gap remains a subject of analysis, its substantial presence is the single most important factor shaping the country’s immediate economic future. It acts as a natural, powerful cap on inflation. When demand is weak and resources are plentiful, businesses have little to no power to raise prices, keeping inflation expectations firmly anchored.
A Decade of Stagnation and an ‘Outlier’ Policy
This situation did not emerge overnight. It is the culmination of ten years of economic inertia. The South African Reserve Bank (SARB), in its April 2025 Monetary Policy Review, continues to monitor key indicators, including this very output gap, to steer its decisions. For over two decades, the bank has relied on a robust inflation-targeting framework, a policy that has been widely credited by institutions like Citadel for successfully anchoring inflation expectations and delivering a degree of macroeconomic stability.
However, that same framework is now being described as an ‘outlier.’ While the source material doesn’t specify why, it suggests that in the current global and domestic context, South Africa’s policy settings may be out of step. This adds another layer of pressure on the SARB to reassess its stance. With the output gap doing the heavy lifting of inflation control, the central bank is presented with a rare opportunity to pivot its focus toward stimulating growth without fear of stoking a price spiral. The current forecast is for this economic slack to hold inflation steady at around 3%, a figure that sits comfortably within the bank’s target range and screams for a loosening of monetary policy.
All Eyes on the SARB: The Case for a Rate Cut
The path forward now seems increasingly clear. The confluence of a large negative output gap and sustained low inflation creates a compelling argument for the SARB to begin a cycle of interest rate cuts. This is not just speculation; it is a conclusion rooted in the central bank’s own research. A working paper published by the SARB in May 2025, titled ‘Less risk and more reward,’ explicitly states the potential benefits. “By reducing nominal interest rates,” the paper notes, “lower inflation also reduces firms’ interest payments on future debt, lowering the hurdle rate for future investment.”
This is the critical transmission mechanism. A rate cut would directly translate into cheaper credit for businesses and consumers. For companies crippled by high debt-servicing costs, it offers immediate relief. For those contemplating expansion, it makes new projects and investments more financially viable. In an economy starved of investment and growth, such a stimulus could prove to be the spark needed to ignite a recovery. The SARB’s decision-making calculus, which considers inflation expectations, the output gap, unit labour costs, and the exchange rate, is now dominated by the sheer size of that gap.
An Uncertain Path, A Glimmer of Hope
While the economic data points overwhelmingly toward rate cuts, a degree of uncertainty remains. The order from the SARB is not yet written. The bank must weigh the benefits of a stimulus against any residual risks, however small, to its inflation-fighting credibility. Yet, the evidence is mounting. A decade of muted growth has dug a deep economic trench, but it is this chasm that may ultimately provide the foundation for a new policy direction.
South Africa stands at a crossroads. It can continue on its path of low growth and high potential, or it can use the policy space afforded by this unique economic moment to take a decisive step toward recovery. The nation’s businesses, workers, and investors are watching. The data has spoken, and now the market waits for the SARB to act.