Economics Weekly
By By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, & Ame Muller
The domestic macroeconomic environment remains challenging in the near term but is expected to become increasingly supportive over the medium term. Real GDP growth is projected to improve modestly from 1.1% in 2025 to around 1.2% in 2026 (revised up from our previous forecast of 1.0%), reflecting positive carry-over effects from the stronger-than-expected first-quarter outcome. Growth is expected to strengthen further to 1.3% in 2027 and around 2.0% by 2028/29. Although our latest near-term forecast remains below our pre-war projection, reflecting the economic effects of the Middle East conflict, the medium-term outlook remains constructive. Lower borrowing costs and continued structural reforms are expected to gradually improve business confidence, investment and employment, providing a firmer foundation for stronger economic growth.
Near-term inflation has increased following global energy market disruptions associated with the conflict in the Middle East, placing renewed pressure on household disposable incomes and consumer confidence. In response, the South African Reserve Bank (SARB) increased the repo rate by 25-basis points (bps) to 7.00%, and we expect a further 25bps increase before the tightening cycle pauses. Survey-based inflation expectations (see Economics Weekly - 3 July 2026) have also risen, reinforcing the case for a continued restrictive monetary policy stance and supporting our expectation of a further 25bps increase at the July MPC meeting.
We expect headline inflation to average 4.3% in 2026, up from 3.2% in 2025, reflecting external spillovers from the Middle East conflict. Inflation is then projected to moderate to 3.5% in 2027 before converging on the new 3% target in 2028 and 2029. While food inflation remains relatively benign, offsetting some of the upward pressure from higher fuel prices, the anticipated El Niño weather pattern presents a modest upside risk to the food inflation outlook. That said, domestic agricultural conditions remain favourable. The anticipated El Niño follows nearly three consecutive years of above-average rainfall, including the wettest season on record, leaving soil moisture levels and water reserves in a strong position. Furthermore, domestic food supplies remain ample, suggesting that a mild-to-moderate El Niño is unlikely to materially disrupt agricultural production or generate a significant increase in food inflation.
Importantly, the recent deterioration in the inflation and interest-rate outlook appears temporary and largely externally driven. Beyond the current period of volatility, inflation is projected to moderate while economic growth gradually strengthens. Together, these developments should create a more supportive macroeconomic environment. Improving real household incomes, along with stronger household and business balance sheets, should support consumption, investment and debt-servicing capacity, while lower borrowing costs are expected to improve affordability and contribute to a gradual recovery in domestic demand and private sector credit extension.
In addition, continued fiscal consolidation, South Africa's credible inflation-targeting framework, including the transition towards a 3% inflation objective, and an improving sovereign credit outlook have helped lower the country risk premium. Together with an expected decline in medium-term interest rates (see SA economic forecast overleaf), these developments should support a more durable and broad-based economic expansion.
Week in review
South Africa's gross foreign exchange reserves declined to $74.1 billion in June, from $76.6 billion in May. The decrease was mainly driven by the lower United States (US) dollar gold price, valuation adjustments, alongside government-related foreign exchange flows. Both gold and foreign currency reserves edged lower. Meanwhile, the forward position rose marginally to $0.585 billion (from $0.584 billion), and Special Drawing Rights (SDR) holdings fell to $6.63 billion from $6.65 billion.
Manufacturing output (not seasonally adjusted) declined by 4.3% year-on-year (y/y) in May, worsening from the 2.9% decline recorded in April. Seasonally-adjusted manufacturing output partially rebounded, increasing by 1.1% month-on-month (m/m) after contracting by 2.6% at the start of the second quarter. However, in the three months to May, output was still down 1.0%, suggesting that the manufacturing sector may continue to weigh on second-quarter GDP growth.
Weekly Round-Up: Economics from Broader Africa
