International background and outlook

War is again shaping the global landscape. The US and Israel's military offensive against Iran, which started on 28 February with an intensive bombing campaign and rapidly escalated to engulf the broader region, has damaged oil and gas production facilities and led to the closure of the Strait of Hormuz, through which more than 20% of the world's oil, gas and fertiliser supply pass. As we write, the situation remains tenuous. While a ceasefire is in place and peace talks continue, the strait remains closed. The stakes are high. The conflict has already claimed thousands of lives and inflicted severe economic damage to most countries in the Middle East. The spillover to the rest of the world through sharply higher oil, gas and chemical prices has also been significant, threatening higher inflation, tighter financial conditions and weaker economic growth worldwide. It remains unclear when and under what conditions the strait will reopen. Even if the conflict ends soon, the damage inflicted to production facilities suggests that global energy supply will remain strained and prices elevated for much of 2026. As a result, global price pressures will be more pronounced and world growth prospects more subdued than initially anticipated. Most major central banks will likely prefer to wait the crisis out, keeping interest rates on hold, as upside inflation risks are partly balanced by downside growth risks. Meanwhile, financial markets will probably remain volatile, with the direction of travel heavily influenced by the news flow on the war. At this stage, investors remain upbeat about the prospects of a quick end to the crisis. Risk appetites have become more selective, leading investors to reduce their exposure to emerging markets while providing a mild boost to the US dollar. However, the gains in safe-haven assets have been modest when compared to previous shocks, suggesting investors remain relatively calm and are still seeking opportunities to buy on the dip. Nonetheless, the risk of a more severe downturn is elevated and largely a function of the duration of the war.

Domestic background and outlook

The economy fared better last year, as GDP growth picked up from 0.5% in 2024 to 1.1% in 2025. Although still slow-going for an emerging market, the country at least moved in the right direction. Faster growth in consumer spending provided the most momentum, but government spending and fixed investment also improved in the second half of the year. However, the country's net trade position weakened further, with exports hurt by higher US tariffs and the temporary expiry of the Africa Growth and Opportunity Act (AGOA) between September and December. The Iran war clouds the growth outlook. The uncertainty surrounding the conflict and its likely implications for global growth, inflation and interest rates will weigh on activity in the months ahead. As a result, we have revised our GDP growth forecast down by 0.2 percentage points (ppts) to 1.2% in 2026 and by 0.1 ppts to 1.5% in 2027. The war has also altered our inflation and interest rate views. Higher petrol prices will exert upward pressure on inflation, lifting the average for the year to around 3.9%, up significantly from our initial expectation of a modest acceleration from 3.2% in 2025 to about 3.4%. With inflation stuck above 3% and upside risks dominating the outlook, we believe the South African Reserve Bank will become more hawkish, given that inflation expectations are highly sensitive to changes in petrol prices. It now seems more likely that interest rates will remain on hold in 2026. The longer the war drags on and the Strait of Hormuz remains closed, the greater the risk of a pre-emptive rate hike in May or July to anchor inflation expectations and ensure inflation's return to the 3% target.