South Africa’s economy: stronger fundamentals, tougher headwinds
Summary and assumptions:
South Africa’s growth: The South African economy maintained its growth momentum into the start of 2026, extending the recovery that began in 2025. Despite a more challenging global environment, the country's improving macroeconomic fundamentals continued to provide support to economic activity. However, the global landscape has changed markedly since the first quarter of 2026, and this is already exerting a negative influence on growth prospects globally and in South Africa.
Global liquidity and bonds: The post-Global Financial Crisis period marked a structural shift in global liquidity according to the BIS. Tighter banking regulation, combined with exceptionally accommodative monetary policy in advanced economies, encouraged investors to move away from traditional cross-border bank lending, towards bond market financing. Emerging market borrowers, including South Africa, became important beneficiaries of this global search for yield. However, higher global inflation, tighter monetary policy and the reversal of quantitative easing have reduced global liquidity and increased the importance of risk differentiation across emerging markets.
SA Bonds: While earlier deterioration in economic fundamentals led to South Africa losing its investment-grade status in March 2020, these have been improving once again, which has increased the country’s attractiveness as an investment destination. A notable development during 2026 has been the resilience of foreign investor demand despite an exceptionally volatile global environment. Foreign demand for South African government bonds is likely to remain supported by attractive real yields, continued fiscal consolidation and improving sovereign credit fundamentals.
Mining: Following a period of exceptional gains throughout 2025 and into early 2026, precious metal prices moderated during the second quarter of 2026. Despite remaining well above their levels a year earlier, the recent correction suggests that some of the extraordinary support from safe-haven demand, supply concerns and speculative positioning has begun to unwind as financial markets adjusted to changing global conditions. On the other hand, despite years of persistent underinvestment, South Africa's attractiveness as a mining investment destination has improved notably in recent years.
Households: Household consumption remained the principal driver of domestic demand although spending momentum slowed markedly during the first quarter. In addition, consumer confidence deteriorated sharply in Q2-2026, falling by 12 index points. The decline coincided with a significant increase in domestic fuel prices and a renewed acceleration in inflation.
Inflation: The latest inflation figures show that headline consumer inflation eased for the first time in five months. Although inflation remains above the SARB's preferred 3% objective and outside its 3% ±1 percentage point tolerance range, the latest outcome suggests that the sharp acceleration observed during the second quarter may have begun to ease. Meanwhile, core inflation is still lower than overall inflation, highlighting that the recent increase in headline CPI continues to reflect cost-push inflation rather than broad-based demand-driven inflation.
Interest rates: Following an extended easing cycle that began in H2-2024, the SARB adopted a more cautious policy stance during the first half of 2026 as inflationary pressures re-emerged. After leaving the policy rate unchanged at two consecutive MPC meetings, the Bank increased the policy rate by 25 basis points in May 2026 in response to rising inflation and a deterioration in the inflation outlook and left rates unchanged in July 2026.
Exchange rate: The rand remained resilient against the US dollar despite heightened global uncertainty, rising geopolitical tensions and periods of increased financial market volatility. This is because it has been supported by a combination of improving domestic fundamentals and favorable capital flows. And although downside risks remain, the rand has demonstrated greater resilience than in previous global risk-off episodes. Meanwhile, the more resilient rand will continue to benefit the country’s inflation as it dampens both imported goods inflation and partially offsets higher dollar oil prices.
The fiscus: The deterioration in municipal finances and service delivery has become an increasingly important constraint on South Africa’s growth and fiscal outlook. In response, the National Treasury temporarily withheld the July 2026 equitable share transfers of several municipalities, including several major metros and economically important municipalities, with the intervention intended to be corrective rather than punitive.
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