By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Ame Muller
Markets, economists and policymakers will be closely watching the release of South Africa's 2Q26 GDP data on Tuesday. The outcome will provide an important assessment of how the local economy performed during a quarter that was heavily affected by a series of shocks, most notably those emanating from the Middle East conflict, and its impact on domestic fuel prices, inflation and financial conditions.
Prior to these shocks, the economy had recorded relatively encouraging growth in 1Q26, with GDP expanding by 0.5% quarter-on-quarter (q/q) and 1.9% year-on-year (y/y). This solid start to the year prompted economists to marginally revise their 2026 growth forecasts higher. The bigger concern, however, is that growth likely moderated materially in 2Q26, as the negative effects of the external shock reverberated across the domestic economy.
Firstly, domestic fuel prices increased by a cumulative R7.76 per litre for petrol and R9.39 per litre for diesel during 2Q26, contributing to a sharp acceleration in headline inflation. Consumer inflation reached 5.0% y/y in June before moderating sharply to 4.3% in July. Secondly, the South African Reserve Bank (SARB) raised the policy rate by 25-basis points (bps) at its May Monetary Policy Committee (MPC) meeting, adding to already challenging financial conditions.
The reference quarter was also characterised by a further deterioration in the labour market, with the official unemployment rate rising to 33.6%. At the same time, both business and consumer confidence weakened materially, reflecting the deterioration in the operating environment.
High-frequency data across production, construction, transport and trade also painted a mixed, but generally softer, picture. Goods-producing sectors were particularly weak, with manufacturing, mining and electricity production all recording quarterly declines on a seasonally-adjusted basis. Given their importance to the economy, these sectors are likely to have weighed on overall GDP growth.
The broader trade data was mixed. Retail trade sales volumes recorded modest quarterly growth, while wholesale trade and motor trade contracted sharply. The decline in motor trade largely reflected decreased fuel sales, workshop activity, accessories and used vehicle sales. Freight transport activity and passenger transportation increased, while activity in the building sector also softened, with building completions reported by the larger metropolitan municipalities declining.
Against this backdrop and considering that some components of the economy were already weak in 1Q26 before the full impact of the external shock, we expect GDP growth to have moderated materially in 2Q26, potentially to around 0% q/q or even marginally lower.
That said, the high-frequency data does not capture the entire economy, leaving room for surprises from the large services sectors. Finance, real estate and business services, storage and communication, and personal services could all provide some offset to weakness in the goods-producing sectors. The notoriously volatile agricultural sector also presents two-sided risks to the quarterly growth forecast. Crop and horticulture production could support growth, although confidence in the sector declined sharply during 2Q26 amid a deteriorating operating environment.
Importantly, we do not believe that the expected 2Q26 slowdown necessarily signals a renewed and sustained deterioration in the growth outlook. Instead, the weakness is likely to have been concentrated in a period of heightened external and domestic shocks.
The economy entered 3Q26 on a somewhat firmer footing. Inflation moderated to 4.3% in July, while the SARB kept interest rates unchanged at its July MPC meeting, providing some stability to financing conditions. Growth momentum in the automotive sector has also extended well into 3Q26, while favourable commodity prices have continued to support mining export revenues and government tax receipts.
There are, however, still areas of concern. The August Manufacturing PMI suggests that weak manufacturing conditions have persisted into 3Q26, although actual production does not always move in line with the direction implied by survey indicators. In addition, domestic fuel prices increased again at the start of September, posing a renewed risk to household purchasing power and the inflation outlook.
Taken together, we expect economic growth to stabilise from 3Q26 onwards, supporting our current forecast of 1.2% growth for 2026. The upcoming GDP release will provide an important indication of the depth of the 2Q26 slowdown and whether the economy is positioned for the expected recovery in the second half of the year. We will unpack the implications for the broader growth outlook following Tuesday's release.
Week in review
Growth in Private Sector Credit Extension (PSCE) slowed to 7.4% y/y in July, from 7.8% in June, largely due to a slowdown in corporate credit growth to a still decent 9.3% from 10.1% in the prior month. Household credit growth increased modestly to 5.1% from 4.9%, underscoring continued solid growth in vehicle asset finance and a modest lift to 3.2% from 3.1% in household residential property finance. Household general loans and advances grew by 5.0%, reflecting a moderation from 5.4% in June.
The monthly trade balance (not seasonally adjusted) recorded a surplus of R20.1 billion in July, an increase from a downwardly revised surplus of R17.2 billion (previously R17.8) in June. The July trade surplus reflected a 0.8% month-on-month (m/m) increase in exports to R193.9 billion, whereas imports contracted by 0.8% to R173.8 billion. Year-to-date, the trade surplus has amounted to R130.9 billion, higher than the R100.6 billion trade surplus recorded over the corresponding period last year. This, alongside weak domestic demand, is consistent with our constructive current account outlook.
The Manufacturing Purchasing Managers Index (PMI) decreased to 45.8 in August from 46.8 in July, marking a fourth consecutive monthly decline and its lowest reading of 2026, signalling a weak start to the second half of the year. The deterioration was driven by a sharp fall in business activity to 40.2 from 48.8 and new sales orders to 40.3 from 44.1, reflecting subdued domestic demand and weak consumer spending. The employment index improved to 46.2 from 42.2, although it remained below the neutral 50-point level, while the purchasing price index remained unchanged at 67.2, indicating persistent input cost pressures. Encouragingly, manufacturers' expectations for business conditions over the next six months improved to 54.7 from 49.3.
Total new vehicle sales (non-seasonally adjusted) increased by 11.4%y/y to 57 898 units in August, reflecting continued robust growth following the 11.9% increase in July. Growth remained broad based, with gains across both passenger and commercial vehicle segments. Passenger car sales were up by 11.6% to 41 216 units, while commercial vehicle sales were up by 11.1% to 16 682 units.
The BER/RMB Business Confidence Index edged lower to 38 in 3Q26, from 39 in the previous quarter, marking its weakest level since 3Q24 and remaining below the long-term average of 40. The latest RMB/BER BCI indicates that most businesses still view prevailing conditions as unsatisfactory, reflecting the combined impact of Middle East-related uncertainty, weaker domestic demand and a challenging operating environment. The deterioration was broad based, with new-vehicle dealer confidence falling by 11 points to 38 as inventories outpaced demand, while manufacturing confidence dropped to 27 from 31, weighed down by weak local demand, softer exports and declining capacity utilisation. The data reinforces the message emerging from recent activity indicators that while pockets of the economy remain resilient, confidence is not yet strong enough to support a meaningful acceleration in investment, hiring or broader economic growth.
Electricity production fell by 7.9% y/y in July, matching the decline recorded in June. On a seasonally-adjusted basis, output decreased by 0.4% m/m following a 0.7% decline in the previous month. The broader trend remained weak, with electricity generation contracting by 1.3% over the three months to July.
Weekly Round-Up: Economics from Broader Africa
Broader African economic conditions remained mixed but generally resilient, with growth momentum strengthening in Nigeria and business credit extension expanding robustly in Eswatini, while lending conditions softened in Namibia. Botswana's trade deficit narrowed on lower imports and resilient copper exports, highlighting the continued importance of favourable commodity demand, while Zambia is seeking to unlock significant value by formalising its largely informal gold sector. Inflationary pressures eased sharply in Lesotho, supported by lower fuel prices, while Ghana benefitted from improving financing conditions and strong gold-related foreign exchange (FX) inflows, although renewed oil-price pressures pose an upside risk to inflation. Mozambique's abrupt change in central bank leadership also underscores the continued importance of institutional credibility and macroeconomic stability across the region.
