The tide is turning for South Africa
South Africa’s economic outlook for 2026 is showing signs of gradual improvement, with a more stable macroeconomic environment and modest growth prospects compared to recent years.
This is according to Izak Odendaal, Investment Strategist at Old Mutual Wealth, and Investec’s Chief Economist, Annabel Bishop.
Odendaal said one of the clearest improvements is in inflation. He noted that South Africa now has a formal inflation target centred around 3%, with inflation currently sitting at relatively low levels.
“2025 was a good year on the inflation front, and I think the outlook is also pretty good as well,” he said.
A stronger rand and lower oil prices have supported some of this improvement. However, Odendaal stressed that inflation has also eased in parts of the economy that are not directly affected by exchange rates or energy costs.
“The sectors that are not linked directly to the exchange rate or to energy prices – you’re also seeing pretty low inflation,” he said.
This is important for the Reserve Bank, which wants inflation expectations to settle closer to 3%.
Odendaal added that this change in expectations affects pricing decisions, wage negotiations and broader economic behaviour.
In the short term, he expects inflation to rise slightly before stabilising again. “It’ll probably creep up over the next couple of months, but then it reaches a base and then starts declining again,” he said.
This environment made it possible for the Reserve Bank to cut interest rates in November, with expectations playing a key role.
“Expectations are so very, very important,” Odendaal said. Lower inflation expectations are also beginning to influence wage negotiations.
Odendaal points to reports of unions reacting negatively to wage offers just above 5%. “A couple of years ago, that initial offer to the union would have been 8 or 9 or 10%”.
He believes the reference point for negotiations has shifted lower and will continue to adjust over time, even if the process is uncomfortable.
South Africa’s long experience with higher inflation, he added, is why the inflation shock of 2022 and 2023 felt less severe locally than in Europe or the US.
Signs of cautious optimism
Odendaal did caution that risks remain, particularly from fuel, food and administered prices. Interest rates have also declined meaningfully, with prime falling from 11.75% to around 10.25%.
Odendaal believes there is room for further cuts, although he expects a cautious approach due to global uncertainty.
If conditions allow, he said South Africa could see another two or three quarter-point cuts by the end of next year.
Beyond inflation and rates, Odendaal pointed to incremental improvements elsewhere. South Africa has exited the grey list, credit ratings have stabilised, and S&P has upgraded the country.
Economic growth has also moved above the sub-1% levels that characterised much of the past decade, with forecasts suggesting growth just above 1% next year.
While this is modest, he noted that load shedding has eased, logistics reforms are under way, private sector involvement is increasing, and political uncertainty has reduced.
Bond yields have also fallen, easing pressure on government finances. “We’re kind of climbing our way out of this hole that we’ve been in for at least the last decade,” he said.
Bishop shared a similar view, describing the outlook as one of “early signs of cautious optimism”.
She expects GDP growth of around 1.5% to 1.6% in 2026, supported by lower inflation and interest rates.
A key driver has been stronger global commodity prices, particularly for metals. “Our largest exports are in fact metals,” she said, with higher prices improving export earnings and supporting the rand.
Bishop also pointed to lower fuel prices, interest rate cuts in South Africa and the US, and a rebound in agriculture following a strong 2025 season.
Together, these factors are contributing to modest inflation and slightly faster growth. While global risks remain, including geopolitics and oil prices, Bishop said current market conditions have been supportive for emerging markets like South Africa.
She added that domestic reforms are increasingly important. Progress under Operation Vulindlela, including improvements at Eskom and Transnet and South Africa’s exit from the grey list, has helped stabilise the economy.
Financial markets have responded, with government bond yields at their lowest levels in about seven years.
While Bishop cautions that credit rating improvements will be gradual, she noted that the overall environment is more stable than it has been in some time, with a clearer platform for moderate growth going into 2026.
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