Tables turn on South Africa

South Africa’s economic fortunes have reversed since the beginning of 2026, when it was widely believed the country’s future was the brightest it has been since 2010.

The country’s economy was expected to grow faster on the back of improving investor sentiment, healthier state finances, and easing financial conditions.

However, these tailwinds appear to have flipped amid conflict in the Middle East, falling commodity prices, and increased pressure on the government’s budget for the current financial year.

This shift has seen the International Monetary Fund cut South Africa’s growth forecast to 1% for 2026, which is below the 1.1% growth rate achieved in 2025.

While some economists say this figure is likely too low given broader emerging-market growth, it indicates that things have fundamentally changed.

The Centre for Risk Analysis (CRA) said the headline number possibly understates the broader risk, regardless of whether it is slightly too low.

It explained that South Africa’s economic recovery is fragile, relying on improving sentiment and consumer spending.

Both of these factors are largely cyclical, with sentiment boosted by soaring precious metals prices in 2025 and consumer spending supported by low inflation and falling interest rates.

This goldilocks period was never going to last forever, with long-term economic growth being driven by fixed investment and improved business confidence.

“Fixed investment contracted 2.2% last year and remains trapped well below the levels needed to generate sustained growth,” the CRA explained.

Apart from this, the commodity cycle that produced a tax windfall for the government appears to be reversing, putting the state’s budget under increased pressure.

The combination of slower growth and lower revenue from mining companies will likely mean the government fails to ensure its debt-to-GDP ratio stabilises in the current financial year.

As a result, the optimism surrounding the state’s finances after the Medium-Term Budget Policy Statement in November 2025 has largely been dashed.

This creates a significant problem, as it undermines improved investor sentiment towards South Africa and delays future credit rating improvements, which would bring substantial investment back to the country.

Household spending under pressure

The bigger issue, the CRA explained, is that the forces driving household spending are beginning to turn, which has significant ramifications for the economy.

South Africa’s economy is primarily driven by consumer spending, and much of its growth in the past few years has come on the back of more household expenditure.

This was driven by low inflation and falling interest rates, which freed up disposable income to be spent on basic foodstuffs or durable goods.

These factors are cyclical, as inflation will not remain low forever and interest rates will not continue to fall forever. Eventually, they will rise.

This is what is happening now, with the conflict in the Middle East sending oil prices soaring, which will push inflation higher and has already halted the Reserve Bank’s cutting cycle.

If oil supply from the region remains disrupted for an extended period, the Reserve Bank is likely to have to increase interest rates to contain inflation.

This will significantly constrain household spending and slow South Africa’s economic growth.

Surging petrol and diesel prices are combined with rising electricity tariffs, which increased from 1 April after Nersa approved an average 8.76% increase for direct Eskom customers.

From 1 July 2026, the tariff for municipal bulk purchasers will increase by 9.01%. The fuel and electricity price increases will feed through to higher prices across sectors.

The CRA said interest rate cuts in 2026 are effectively off the table, meaning that consumers with debt can expect no more relief.

“In our assessment, interest rates will be maintained at the current level for the time being. Any cuts in 2026 are highly unlikely, and increases this year cannot be ruled out,” the CRA said.

As a result, household spending is unlikely to continue growing at the same rate it did in 2025, putting pressure on broader economic growth in South Africa.

This now puts renewed pressure on South Africa’s reform agenda, which must be pursued with greater urgency to attract more fixed investment.

Increased fixed investment is a driver of more sustained economic growth as it improves productivity and is not as heavily impacted by cyclical events.

“Now, with international market and investor sentiment ebbing, 2026 will show whether South Africa’s policy and legislative ‘reforms’ have done enough to shift fixed investment onto a higher track,” the CRA said.

For sustained growth, this will have to be the case, as the country cannot depend on commodity prices and household spending alone.

In fast-growing economies, fixed investment as a share of GDP is between 25% and 30%. In some emerging market economies, it is even higher.

For the past decade, South Africa’s fixed investment levels have been stuck between 13% and 15% as a share of GDP, resulting in lacklustre economic growth.

Article originally appeared here.