By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Ame Muller
Despite near-term challenges, South Africa's medium-term outlook points to a gradual improvement in economic growth alongside a moderation in inflation. We expect GDP growth to rise from around 1.1% in 2026 to approximately 2.1% by 2030, while inflation gradually moves from 4.3% towards the South African Reserve Bank's (SARB's) 3.0% target. Although this represents a meaningful improvement, it should not be interpreted as a structural growth breakthrough. Rather, it reflects the economy's potential to extract more value from its existing productive capacity while gradually expanding that capacity through investment and reform.
A gradual recovery in economic activity
South Africa's growth potential remains constrained by longstanding structural challenges, including weak fixed investment, infrastructure bottlenecks, low productivity and limited employment creation. Nevertheless, gradual improvements in electricity supply, freight logistics and the broader operating environment could support a recovery in economic activity.
The key opportunity is not necessarily a rapid increase in the economy's underlying growth potential, but better utilisation of the capacity that already exists. More reliable electricity, an improved freight and port performance, and fewer regulatory bottlenecks can reduce disruptions and operating costs, allowing businesses to produce and distribute more efficiently, which could lift economic activity even before the country fully resolves its deeper structural constraints.
Investment and productivity are critical to unlocking the efficiency dividend
A more durable improvement in growth will ultimately depend on investment and productivity. Greater reliability in electricity, rail, and port infrastructure can reduce operating costs, improve competitiveness and enable businesses to use existing capital more effectively. At the same time, investment in energy, transport, water, telecommunications, agriculture, mining, manufacturing and other industries would expand productive capacity and raise the economy's potential growth over time.
With limited fiscal space, mobilising private-sector investment and improving the efficiency of capital allocation will be critical. Several policy initiatives are aimed at addressing these constraints. The Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), for example, has helped attract private investment into electricity generation and expand generation capacity. The broader Operation Vulindlela programme continues to support reforms in key network industries, including electricity, water, transport and telecommunications, by addressing regulatory bottlenecks and improving the investment environment.
These reforms matter because the efficiency dividend is not simply about doing more with less, it is about reducing the economic costs of existing constraints while creating the conditions for new investment to generate additional productive capacity.
The resulting gains could become an important source of medium-term growth. However, their realisation depends on consistent reform implementation, stronger investor confidence and a sustained recovery in fixed investment.
Growth and inflation dynamics
A gradual improvement in medium-term growth alongside moderating inflation is an achievable, albeit conditional, outcome. Growth supported by improved productivity, more reliable infrastructure and lower operating costs can allow the economy to expand without generating the same degree of inflationary pressure as demand-led growth.
A sustained transition towards the SARB's 3.0% inflation target should also help anchor inflation expectations and improve the investment environment over time. However, the path is unlikely to be linear. External shocks, exchange-rate movements, commodity prices and domestic supply constraints can continue to generate periods of higher inflation.
The key is therefore that stronger growth increasingly needs to be underpinned by improvements in the economy's productive capacity rather than by demand growth alone.
Risks and the path ahead
The outlook remains conditional on continued progress in addressing structural constraints. Delays in infrastructure reform, persistently weak investment, limited productivity gains, fiscal pressures and renewed energy or geopolitical shocks could undermine the projected improvement in growth. Exchange-rate movements and changes in global demand also remain important risks.
There is also a risk that the efficiency gains from reforms take longer to materialise than expected. Improved infrastructure reliability may initially reduce disruptions and costs without immediately translating into higher investment or employment. The challenge is therefore to convert operational improvements into sustained private-sector investment and broader productivity gains.
Conclusion
Overall, South Africa's projected improvement in growth does not assume a sudden economic transformation. It rests on a more gradual efficiency dividend from better infrastructure, stronger investment and improved productivity. If these gains are sustained, the economy can move towards moderately faster growth while inflation gradually converges towards the SARB's 3.0% target. The opportunity is meaningful, but its delivery will depend on consistent reform implementation, stronger investment and sustained productivity gains.
Week in review
Gross foreign exchange reserves declined by $0.53 billion month-on-month (m/m) to $57.4 billion in September. This reflected a $1.1 billion decrease in gold reserves to $16.9 billion, partly offset by a $0.57 billion increase in foreign exchange reserves, including foreign currency deposits. South Africa's international liquidity position (ILP) also declined, from $73.7 billion to $72.3 billion over the same period. The SARB attributed the decreases in gold reserves and the ILP mainly to a lower US dollar gold price, foreign exchange and asset price valuation adjustments, and foreign exchange payments made on behalf of government.
Following a modest performance at the start of 3Q26, manufacturing activity weakened in August. Non-seasonally adjusted manufacturing production declined by 4.3% year-on-year (y/y), following a 1.1% increase in July. On a seasonally-adjusted basis, which is relevant for assessing the sector's contribution to quarterly GDP growth, output contracted by 3.1% m/m, interrupting three consecutive months of expansion. The annual decline reflected broad-based weakness, with nine of the ten manufacturing divisions recording lower output. Cumulatively, manufacturing production declined by 1.7% y/y in the first eight months of 2026, a deeper contraction than the 1.3% decline recorded for the full year in 2025.
The persistent weakness points to subdued demand, elevated input costs and a less supportive external environment, compounded by the uncertainty surrounding the Middle East conflict. Although the manufacturing PMI recovered to 50.7 points in September from 45.8 in August, and while manufacturers' near-term business expectations improved marginally, the outlook remains challenging. The cumulative increase of more than R13.00 per litre in diesel prices since the start of the year will continue to put pressure on production, transportation and distribution costs, weighing on manufacturers' margins and potentially constraining output.
Weekly Round-Up: Economics from Broader Africa
Recent data releases across Africa point to a mixed regional outlook. Eswatini continues to post strong, broad-based growth, while Namibia's accelerating credit extension signals improving domestic demand. Mozambique is navigating a gradual recovery alongside lingering inflation risks, while Botswana's mining sector remains under pressure from weaker diamond prices. Inflation remains contained in Lesotho, but higher oil prices have reintroduced inflation risks in Ghana and Nigeria despite generally supportive external conditions. Meanwhile, Zambia's new 20-year government bond marks a further step in deepening domestic capital markets and expanding long-term financing options.
