By Thanda Sithole
Key takeaways
In a nutshell
Real GDP contracted by 0.2% q/q in 2Q26, following revised growth of 0.4% q/q in 1Q26. This represents a material moderation in economic activity and ends six consecutive quarters of GDP growth. The outcome was slightly below our forecast of 0.0% and the market consensus of -0.1%. On an annual basis, growth moderated to 0.9% y/y, from 1.9% y/y in the previous quarter, with year-to-date growth at 1.4%, ahead of our full-year forecast of 1.2% for 2026.
On the production side, economic activity was weighed down primarily by manufacturing, mining, and trade sectors, while transport, finance, government and personal services largely provided some offset. Specifically, mining and manufacturing production declined by 3.0% q/q and 1.8% q/q, respectively. Meanwhile, trade, catering and accommodation declined by 1.9%, largely on the back of weak wholesale trade sales, motor trade (particularly used-car sales and fuel sales) and food and beverage sales.
On the expenditure side, household consumption expenditure remained relatively resilient, expanding by 0.4% q/q (and 2.5% y/y from 3.3% y/y in the prior quarter) despite the impact of higher fuel prices, elevated living costs and tighter financial conditions. Despite resilient household consumption, compensation of employees declined by 0.5% q/q, pointing to significant pressure on labour income amid weak employment and economic growth.
Gross fixed capital formation (GFCF) declined by 0.2%, marking the second consecutive quarterly decline, though it did record 1.5% growth compared to 2Q25. The quarterly decline reflected continued weakness in private sector GFCF and a modest relapse in public corporations GFCF.
The external sector weighed on growth, with exports expanding modestly by 0.9% q/q from 0.2% in 1Q26, while imports increased robustly by 4.9% from -2.2%.
A weak quarter, but not necessarily a weaker medium-term growth story
The moderation in GDP growth during 2Q26 was broadly anticipated and reflects, to a significant extent, the impact of several temporary shocks that affected economic activity during the quarter.
The escalation of the Middle East conflict resulted in a sharp increase in international oil and domestic fuel prices, raising transportation and production costs across the economy. At the same time, tighter financial conditions following the South African Reserve Bank's (SARB's) decision to increase the policy rate by 25-basis points (bps) in May added further pressure to interest-sensitive areas of domestic demand.
Importantly, the weakness in 2Q26 should therefore not necessarily be interpreted as a renewed deterioration in the underlying growth trajectory. Rather, it reflects the combination of an already subdued domestic economy and a significant external shock during the reference quarter.
There are signs that some of these headwinds have begun to dissipate. Inflation moderated to 4.3% in July, while fuel prices have subsequently moved lower, with September petrol prices approximately 4.1% below their peak and diesel prices around 6.6% below their peak. This should provide some relief to households and businesses during the second half of the year.
The stabilisation in business confidence is also encouraging. The RMB/BER Business Confidence Index has largely avoided a further deterioration, while the Agbiz/IDC Agribusiness Confidence Index has recovered from its earlier weakness. These developments, together with continued resilience in new vehicle sales, suggest that domestic economic activity is not experiencing a broad-based deterioration.
Implications for monetary policy
Today's GDP outcome reinforces the difficult trade-off facing the SARB. On the one hand, the economy remains weak, with growth still well below the rate required to make a meaningful dent in unemployment and improve household incomes. The moderation in 2Q26 therefore argues against a further tightening in monetary policy. On the other hand, the recent inflation shock means that the SARB cannot respond mechanically to weaker growth. With the inflation target now centred on 3.0%, the Monetary Policy Committee (MPC) will need to assess whether the recent increase in inflationary pressures is temporary or likely to become embedded.
Our expectation is still that the SARB will remain cautious and potentially hike by another 25bps later this month. However, beyond the near term, we expect policy easing with the timing and pace dependent primarily on the trajectory of inflation and evidence that inflation expectations are converging sustainably towards the 3.0% target.
Outlook
We expect economic growth to stabilise from 2H26 onwards as the impact of the Middle East-related shock fades, financial conditions become less restrictive and domestic confidence improves.
However, the recovery is likely to remain gradual. Structural constraints, including weak electricity and logistics infrastructure, low productivity, and subdued fixed investment, continue to limit the economy's potential growth rate.
Over the medium term, we expect growth to gradually move towards 2.0%, supported by lower inflation, eventual monetary-policy easing and progress on structural reforms. A sustained improvement in fixed investment will be particularly important if the economy is to move beyond the current low-growth equilibrium.
