South Africa's Economic Growth Streak Faces Collapse; Contraction Predicted for Q2

South Africa’s longest quarterly growth streak in nearly a decade is set to end. The economy is projected to contract 0.1 percent in the second quarter, reversing the 0.5 percent expansion recorded in the first, according to a median estimate drawn from 14 economists surveyed by Bloomberg.

The reversal reflects a compounding of external and domestic pressures. The first quarter captured only the initial shock of the Iran conflict that began February 28. The second quarter absorbed its full weight. Sustained fighting has disrupted global shipping lanes, particularly the Strait of Hormuz, through which approximately one-fifth of the world’s seaborne oil and liquefied natural gas supplies flow. Brent crude prices climbed. Agricultural input costs followed. Both rippled through South Africa’s domestic economy in ways the opening quarter did not fully register.

Manufacturing and mining, together representing nearly a fifth of gross domestic product, contracted sharply during the period. Manufacturing output fell 1.5 percent; mining declined 2.7 percent. Higher input costs tied to the global conflict drove both declines. The South African Reserve Bank’s 25-basis-point interest-rate increase in May added a further constraint, beginning to suppress domestic demand as the quarter progressed.

Keabetswe Mojapelo, head of economic research at Old Mutual, described the environment plainly. “For the most part, we’ve had very weak high-frequency data throughout the quarter, sentiment has been quite subdued,” he said. Consumer-facing sectors have shown some resilience, but Mojapelo cautioned that “it’s really touch and go,” with the full impact of rising inflation and monetary tightening still filtering through.

Meanwhile, the Reserve Bank’s monetary policy committee faces a sharper dilemma ahead of its September 23 interest-rate decision. Inflation has remained above the bank’s 3 percent target since March. Morgan Stanley economist Andrea Masia identified the core tension: weak growth and a strong rand on one side, above-target near-term inflation and elevated oil prices on the other. Masia pointed to fading momentum in inflation shocks as evidence that oil prices are no longer propagating widely, suggesting the committee will hold rates steady at its upcoming meeting.

Not every economist expects contraction. A minority of survey respondents forecast positive growth, though at a slower pace than previously anticipated. Independent economist John Loos projects that pressure from the Iran conflict will intensify in the second half of the year as higher inflation and interest rates constrain spending. “The slowdown in real consumer spending from last year will be a key contributing factor,” Loos said, adding that he expects continued positive growth but at a reduced rate.

Retail and wholesale trade data reinforce the picture of spreading weakness. Retail sales rose just 0.4 percent in the second quarter while wholesale trade slumped 4.2 percent, both figures pointing to diminished consumer and business activity. Export-driven sectors face additional headwinds as the conflict feeds through into household incomes and productivity.

Investment activity is also under pressure. Mojapelo warned that uncertainty triggered by the conflict is likely to keep gross-capital-formation levels suppressed. Sentiment indicators have deteriorated, with numerous surveys identifying war-related uncertainty as a primary constraint. Rising interest rates compound the problem, increasing funding costs for businesses weighing new projects.

The second-quarter GDP outcome will carry direct policy weight. Reserve Bank officials must now balance weak growth against persistent inflation concerns, a calculation that will shape how quickly monetary conditions tighten and whether the central bank prioritizes price stability or growth support in the months that follow.