South Africa growth outlook cut as Middle East oil shock raises inflation risks

South Africa’s economic recovery is facing fresh pressure after a surge in global oil prices linked to the escalating Middle East conflict forced analysts to cut growth forecasts and warn of rising inflation risks for Africa’s most industrialised economy.

• The Institute of International Finance has cut South Africa’s 2026 growth forecast to 1.3% as conflict in the Middle East drives up global energy costs.
• Inflation is now expected to rise to 4%, prompting markets to shift from expecting interest rate cuts to possible hikes.
• South Africa’s dependence on imported fuel and diesel is exposing the economy to global supply disruptions and rising transport costs.
• Economists warn that prolonged instability around the Strait of Hormuz could worsen inflation, weaken the rand and strain public finances across Africa.

The Institute of International Finance (IIF) said on Tuesday it had lowered South Africa’s 2026 economic growth forecast to 1.3% from 1.7%, citing higher energy costs, renewed market volatility and growing risks to fuel supplies.

The downgrade comes as the war-linked disruption around the Strait of Hormuz, one of the world’s most critical energy shipping routes, continues to shake global oil and fuel markets.

Around one-fifth of the world’s oil trade normally passes through the strait, making any disruption a major threat to energy-importing economies.

South Africa is particularly vulnerable because it now relies heavily on imported refined fuel after years of refinery closures and declining domestic refining capacity.

Analysts say the country’s growing dependence on imported diesel, petrol and aviation fuel from Gulf producers has left it increasingly exposed to geopolitical shocks.

The IIF now expects South Africa’s inflation rate to average 4% this year, up from earlier expectations of around 3%, as higher oil and transport costs ripple through the economy.

That shift is already changing expectations in financial markets. Investors who had previously expected interest rate cuts from the South African Reserve Bank are now increasingly pricing in the possibility of rate hikes instead, as policymakers try to contain inflation and protect the rand.

The rand has already come under pressure from rising global uncertainty and investor caution surrounding the conflict.

Diesel prices are emerging as one of the biggest concerns for South Africa because the fuel powers much of the country’s mining, freight, agriculture and logistics industries.

Meanwhile, diesel-importing economies such as South Africa are among the most exposed to the current global fuel shock.

Economists warn that sustained increases in diesel prices could feed into food inflation, transport fares and electricity costs, further squeezing households already struggling with weak wage growth and high unemployment.

South Africa’s current account deficit is now expected to widen to 1.1% of GDP in 2026 from 0.5% previously, according to the IIF, while the fiscal deficit for the 2025/26 financial year is estimated at 4.5% of GDP before easing slightly in the coming years.

Government debt is projected to stabilise gradually at around 77.1% of GDP over the medium term.

The warning from the IIF adds to broader concerns that the Middle East conflict could slow economic growth across Africa.

A joint policy brief released by the African Development Bank, United Nations Development Programme and UN Economic Commission for Africa warned last month that prolonged disruption to energy and shipping routes could reduce Africa’s GDP growth by at least 0.2 percentage points this year if the conflict drags on.

The International Monetary Fund has also warned that the war is creating one of the biggest global energy shocks since the Russia-Ukraine conflict, with higher oil prices threatening growth and pushing inflation higher worldwide.

Oil prices briefly surged above $110 per barrel earlier this year as fears grew over shipping disruptions through Hormuz, raising concerns about steep fuel price increases in South Africa and other major importers.

Still, economists say South Africa could also benefit from some of the global trade disruptions.

The IIF noted that cargo rerouting around the Cape of Good Hope could increase activity at South African ports, while elevated commodity prices may support mining investment and export revenues.

That could provide some relief for Transnet, the state-owned freight rail and ports operator that has spent years battling operational failures, theft, infrastructure damage and severe congestion that have cost the economy billions of dollars in lost exports.

Mining companies and business groups have repeatedly argued that improving rail and port efficiency remains one of the fastest ways to unlock stronger economic growth in South Africa.

For now, however, economists say the country remains highly exposed to external shocks at a time when growth is already weak, unemployment remains above 30%, and consumers are battling rising living costs.