South Africa's GDP Contraction: Impact on Households and Economy

South Africa's economic recovery was interrupted rather than completely derailed, as the economy unexpectedly contracted in the second quarter. The causes were a global energy shock, weak investment, and pressure on key sectors.

According to data from Statistics South Africa, published on Tuesday, the gross domestic product (GDP) decreased by 0.2% in the second quarter. This figure canceled out the 0.4% growth recorded in the first three months of the year, marking the first contraction since the third quarter of 2024.

Weakness was concentrated in three of the ten economic sectors, while the other seven demonstrated expansion during the quarter. The sharpest fall was recorded in the mining industry, which shrank by 3% due to reduced production of platinum group metals, manganese, gold, and iron ore. Manufacturing fell by 1.8%, with seven out of ten sub-sectors showing negative growth.

Trade, hospitality, and accommodation declined by 1.9%, reflecting weakened activity in wholesale and automotive trade, as well as in food and beverages.

Deep Impact

Despite the mining industry showing the largest percentage decline, the trade and manufacturing sectors had the greatest impact on GDP. Seven sectors nevertheless expanded, although overall growth was moderate. The strongest performers were the electricity, gas, and water sectors, as well as public services, which grew by 1%. Growth was also recorded in agriculture, construction, transport, finance, personal services, and household consumption.

Economist Lerato Ntuli of Anchor Capital noted that the result was weaker than consensus expectations, which had forecast growth at 0.1%. She added that the annual growth slowed to 0.9%, below the market expectation of 1.2%.

Ntuli linked this weakness to the conflict in the Middle East and the sharp rise in global oil prices, explaining the increased import bill due to higher fuel costs. She also predicts that price pressure will remain high in the third quarter due to crude oil price increases, despite consumer resilience.

Dr. Ntuli believes that this contraction does not rule out an interest rate hike. She stated that for the Monetary Policy Committee, the contraction is not grounds to forgo a hike on September 23rd. Anchor Capital expects a further increase of 25 basis points at the end of this month, as inflation risks remain upward-trending, even though the CPI fell to 4.3% in July from 5%, and inflation is projected by her to exceed 4% until early 2027.

Rate Hike?

Professor Raymond Parsons of the Northwestern University School of Business also pointed to the global energy shock and international pressure on growth and inflation. He noted that the recovery observed in the second half of last year failed to gain expected momentum, while finance, business services, and transport led in growth, and mining and manufacturing lagged.

However, Parsons views this contraction as a temporary setback, not the end of the recovery. He believes the economy is in a state of interrupted and postponed recovery, not a completely derailed one, with household spending appearing stable. Parsons now forecasts real GDP growth of about 1.2% this year, lower than the previously expected consensus of 1.6% for 2026.

Failure

Looking ahead, Investec Chief Economist Annabel Bishop highlighted El Niño as a potential constraint on next year's forecast. Although agriculture is expected to benefit from abundant harvests this year, Bishop warned that adverse weather conditions could negatively affect its results. She does not expect El Niño to have as strong an impact on inflation and growth as previous extreme droughts, but she predicts certain consequences for next year.

The contraction also fell at the lower end of the range predicted by PSG Senior Economist Johann Els before the GDP data was released. He expected the economy to either stagnate or contract by a maximum of 0.2%, calling the second-quarter data a 'mixed picture'. Before the release, Els stated that a result within his forecast would allow the economy to remain on a growth trajectory of around 1.4%–1.6% this year, compared to 1.1% in 2025.

Households in South Africa are experiencing severe difficulties managing monthly budgets as expenses for utilities, transport, and food consume an increasing share of their income, turning the cost of living crisis into a struggle for survival for families.

Recent data on household affordability demonstrates this problem, despite a seemingly lower overall inflation rate. In August, the average cost of a food basket was R5 479.80, according to the Pietermaritzburg Economic Justice and Dignity Group (PMBEJD). Although this amount was 0.9% lower than in July, it remained 1.8% higher than a year ago. Of 44 tracked products, 19 increased in price, while 25 decreased.

The group's director, Marvin Abraham, notes that families do not receive income but rather allocate money across fixed expenditure items: food, electricity, and transport. They first pay for the most essential things that cannot be avoided.

Abraham emphasizes: 'Households do not receive income and do not allocate fixed amounts for food. First, they pay for absolute necessities: rent or mortgage, electricity, transport.' He adds that the food budget only appears after these basic expenses are covered, and purchases are made with the remaining funds, which often leads to buying smaller quantities and less nutritious food.

The group's calculations show how little is left of 'what remains.' In August, R3 183.45 was spent on electricity and transport, accounting for 65.8% of a worker's salary, leaving R1 653.35 for food and other necessities. Thus, the affordability crisis is related not only to the price of bread, chicken, or maize meal, but also to the competition between several unavoidable expenses for the same income.

The Competition Commission's report for August 2026 also highlights the current pressure, warning that fuel price shocks have consequences far beyond petrol stations. The Commission points out that the first half of 2026 was characterized by a 'significant increase in fuel costs,' driven by geopolitical tensions and disruptions in global oil supply chains, exacerbated by exchange rate pressure.

The Commission notes that the rise in fuel and transport costs has spread not only to commuting but has also increased production, logistics, and distribution costs across the economy, putting upward pressure on essential goods. The Commission believes that the task is to balance the financial sustainability of vital services with the burden on households, especially when tariffs rise faster than inflation, and vulnerable populations do not receive effective support.

For workers, the problem boils down to whether income can keep pace with rising prices. Abigail Moyo, a representative of the United Association of South Africa (UASA) union, stated that households are already on the brink of collapse. She added that the rise in fuel prices will only intensify the financial pressure on ordinary South Africans whose budgets are already severely strained.

Moyo argued that the solution cannot be to expect workers to absorb the increased costs themselves. She noted that the adjustment of fuel prices is the reason why UASA and its members in the sugar sector went on strike to fight for wage increases and benefits that match inflation. She called on the government to review fuel pricing mechanisms, including fuel and excise taxes, and employers to recognize inflation-linked salary indexing as necessary for workers' survival amid the rising cost of living.

Pensioners feel particular pressure. At SASSA offices in Wentworth, Durban, pensioners are demanding an increase in the old-age grant to R5 000 per month, arguing that the current amount does not cover basic living needs. The maximum old-age grant is R2 400 per month, and for recipients over 75 years old, it increases to R2 420. Pensioner Quinton Eri describes the situation as extremely difficult: 'We barely make ends meet on R2400. Our water bill keeps going up. We go to Sasa, and then sometimes we sit here for two or three days because they don't work. Life has become a huge struggle. You can't even afford to buy the food you eat. The food we buy is not enough. So we worry about where the next meal will come from.'

He also noted that even buying meat has become a luxury, as people are forced to eat chicken because they cannot afford mutton or beef. Social activist Jean Chodry stated that pensioners are forced to cope with the responsibilities of supporting other family members. He insisted that pensions should be doubled at least, as besides themselves, they care for grandchildren, have utility bills, rent, and groceries.

A petition launched by Jay C Alex titled 'Support South African Pensioners to Restore Dignity and Respect' has gathered over 33,000 confirmed signatures calling for increased support for pensioners struggling with food, medicine, and electricity shortages.

The consequences extend to children. The group calculated that the basic nutritious basket for a family of seven cost R6 597.25 in August, and the average cost of providing one child with a basic nutritious diet was R961.96, while the child grant is R580. Abraham warned that when households are forced to sacrifice nutrition, the consequences go far beyond the monthly grocery bill. He described it as an intergenerational poverty trap that starts right at the table of young children under five. For him, relief cannot come solely from lowering food prices; a significant impact on the quantity of food purchased will come from reducing electricity and transport costs.

Although economic indicators point to the resilience of the South African economy, the observed improvements have not yet translated into the desired boost in growth and job creation.

Data on South Africa's second-quarter economic growth is expected to be released on Tuesday. This data will provide a fresh look at an economy grappling with high unemployment, weak business confidence, and the fallout from sharp fuel price hikes.

For a deeper analysis, IOL has developed its own Economic Health Index, which considers ten key metrics to form an overall score out of ten. Growth and employment carry the greatest weight in this index. This index is based on IOL's proprietary research and publicly available data, without the involvement of economists.

According to this index, positive aspects such as a healthy trade balance, a stable rand, and improved power supply are being offset by sluggish growth, exceptionally high unemployment, and reduced business activity.

Growth: The Main Indicator

Based on this index, the Gross Domestic Product (GDP), weighted at 20%, received a rating of 4 out of 10, according to first-quarter data. As a measure of the volume of goods and services produced, GDP increased by 0.5% compared to the previous three months, marking the sixth consecutive quarterly expansion.

Nevertheless, GDP is only one indicator of the economy's health, and the overall picture is far more complex. Investec economist Lara Hodges predicts that the second quarter's economy remained stagnant, with the possibility of a moderate decline. Hodges noted that the war in the Middle East, which began in late February, led to significantly increased costs due to a substantial rise in global oil prices, heavily impacting activity.

Hodges also anticipated further contractions in the manufacturing and mining sectors: manufacturing production fell by 1.6% in July, and mining fell by 4%, with both sectors having failed to contribute to economic growth for a long time. Mineral production decreased by 2.7% compared to the previous quarter in the second quarter, manufacturing contracted by 1.5% for the fourth consecutive quarter, and electricity generation dropped by 2.5%.

The labor market is one of the most obvious signs of weakness. The official unemployment rate in South Africa rose to 33.6% in the second quarter from 32.7% in the first, reaching its highest level in four years. More detailed information can be obtained from data on whether South Africans are finding jobs, whether businesses are investing, whether households are spending, or whether the country is receiving enough foreign income. Currently, these indicators tell completely different stories, according to IOL's internal economic index.

Consumers: Spending, but Cautiously

In parallel, consumers continue to spend money: real retail sales adjusted for inflation grew by 1.6% year-on-year in June and by 1.7% in the second quarter compared to the previous year. Although employed South Africans are spending, they are becoming more cautious about how they do so. According to recent NielsenIQ data, consumers are increasingly purchasing fast-moving consumer goods based on the availability of discounts.

South Africans spent R347.7 billion on FMCG goods in the first half of 2026, with sales volume increasing by 5.5% and units sold by 7.7% compared to the same period last year. Zak Khairi, CEO of NIQ South Africa, noted: 'The theme of the first half of the year was the consumer, who continued to become more cautious and price-sensitive.'

Meanwhile, the FNB/BER consumer confidence index paints a significantly weaker picture. The index sharply dropped from minus seven in the first quarter to deeply negative minus 19 in the second quarter because the rise in fuel prices hit household budgets. As Investec chief economist Annabel Bishop previously noted: 'Changes in inflation affect consumer purchases because real incomes determine the ability to spend on goods and/or take on debt.'

She added that 'the distorting effects of inflation give a false impression of consumer purchasing power based on their disposable income.'

Inflation: Some Relief, New Risk

There has been some easing since then. Consumer price inflation slowed more than expected, standing at 4.3% in July compared to 5% in June, and food and non-alcoholic beverage inflation is now below 1%, the lowest figure in 16 years. However, the recent increase in petrol prices by R1.34 per liter and wholesale diesel by as much as R3.15 per liter will negatively impact the cost of living—which, according to DebtBusters' fifth annual money stress tracker, is the main problem keeping South Africans awake.

Before the price hike, Bishop warned that rising prices in the region would push inflation up. She stated: 'Although CPI is expected to peak, a further sustained escalation of the Middle East war could disprove this.'

Tensions in the region have intensified in recent days. The conflict between the US and Iran escalated after the expiration of the 60-day talks on the Strait of Hormuz, accompanied by intense air skirmishes and rising regional tension.

Trade and Rand: Bright Spots

Despite this, South Africa recorded a trade surplus of R20.1 billion in July, and its current account was already in surplus in the first quarter—indicating that exports are a positive factor for the health of the South African economy. The rand has also proven surprisingly resilient. Bianca Bothes, CEO of Citadel Global, reported that the currency traded around R15.98 per dollar last week, strengthening by approximately 2% compared to the previous month.

Bothes emphasized: 'Overall, the rand is in a good position at the current level, but it remains a volatile reflection of global risk appetite.'

Peter Little, fund manager at Anchor Capital, noted that the rand rose by 2.6% in August, becoming the second best-performing major currency for the month, while the JSE's ALSI rose by 4.6%.

Business Confidence: Still Reserved

Businesses are facing difficulties: the RMB/BER business confidence index fell to 38 in the third quarter from 39, significantly below the neutral level of 50, indicating that nearly two-thirds of respondents remain dissatisfied with the current business climate. Bishop noted that business confidence has been suppressed since the global financial crisis, exacerbated by years of state capture and low growth, averaging around 38 since mid-2008, excluding the COVID-19 lockdown period. Confidence improved from late 2024 to early 2026 due to improved political sentiment and investor mood, lower inflation, and reduced power outages, but higher fuel costs have once again damaged profitability. Bishop reported that Investec has revised its 2026 GDP growth forecast from 1.5% to 1.3%.

Industrial Overview: Mixed

At the manufacturing level, the Absa Purchasing Managers' Index (PMI) fell from 46.8 in July to 45.8 in August, marking the fourth consecutive decline and the weakest figure of the year. Despite this, the Absa indicator reflecting expected business conditions in six months jumped by 5.4 points to 54.7, returning to the expansionary zone. The broader private sector PMI from S&P Global also remained above the 50-point dividing line between contraction and expansion, reaching 50.5 in August compared to 50.3 in July.

Electricity is another area where conditions have substantially improved, though structural limitations in South Africa remain. Eskom reported that in its latest financial year, there were only four days of power outages compared to 329 days two years ago, although municipal debt and grid issues remain serious concerns. Thus, while the figures suggest the South African economy is holding up, the improvements have not yet translated into the most important aspects: stronger growth and more jobs.