01 Apr 2026
Q2.26 Macro-Economic Outlook: a short war but a lag in inflation effects
Markets are betting on a short-lived Middle East conflict, with oil prices retreating and risk appetite returning. Yet the economic aftershocks will linger. While global growth may escape largely unscathed, higher fuel costs are already feeding through to inflation, particularly in import-dependent economies such as South Africa. The result is a familiar pattern: muted GDP effects, but a delayed squeeze on prices, interest rates and household finances.
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With huge uncertainty over the war in the Middle East, markets still reacted with some enthusiasm over US comments yesterday on ending the war in the next few weeks, seeing the oil price drop from US$113/bbl, to close to US$100/bbl today.
Appetite for the war has generally waned, particularly in the US as approval ratings for President Trump have hit a low in his second term, while Trump’s perceived handling of the economy dropped below that of Biden’s (and of Trump’s first term).
Such sentiment readings can be crushing to Presidents if they persist, and yesterday Trump is reported to have said on Iran, “(w)e will be leaving very soon”, “their equipment's been totally decimated". "They cannot have a nuclear weapon."
And furthermore, "Iran doesn't have to make a deal", adding in order to bring gasoline (petrol) prices down in the US "(a)ll I have to do is to leave Iran and we will be doing that very soon", "(t)hey're losing”.
The US President won the election on a number of items, key of which was improving living standards, particularly strengthening the US economy and limiting increases in living costs, with higher fuel prices in the US key in losing him popularity.
And on the Strait of Hormuz, that “it’ll automatically open, but my attitude is, I’ve obliterated the country. They have no strength left, and let the countries that are using the strait, let them go and open it”.
The rand gained to R16.75/USD today, while the JSE rose to 116 628 with risk aversion waning in global financial markets. The taco (Trump always chickens out) trade is seen to be alive and well, but some risks, particularly for volatility, persist.
Infrastructure has been damaged in the Middle East, and supplies have been disrupted. Oil prices are not expected to drop straight back to pre-war levels (US$65/bbl) and instead are likely to still see some elevation over Q2.26.
The lagged effects of the Middle East war on inflation and South Africa’s other economic indicators will continue over the remainder of the year, with CPI inflation rising to 4.0% y/y this year, and a 25bp interest rate hike near mid-year in turn.
While CPI inflation is expected to jump up towards 4.0% y/y in Q2.26, on lagged effects from higher rand oil prices over March, April already is expected to see some moderation in the rand price of petroleum products, key for May’s fuel prices.
A further fuel price hike is not expected for South Africa in May. Furthermore, the R6bn cost to the fiscus for April (R3.00/litre reduction in the general fuel levy) has now been met with news of overcollection in tax revenues for 2025/26 of R3bn.
South Africa’s planned fiscal consolidation will not be interrupted by the remaining R3bn cost, and indeed, the improved investor climate SA experienced this year and last is likely to persist after the temporary interruption of the Middle East war.
This is not to say the impact of the war on South Africa’s economy is over, or near to being over, as lagged effects from higher fuel prices will feed through as well as second round effects, but these are not likely to be very large impacts.
The higher CPI base in Q2.26 does mean the usual CPI monthly increases will be rolling off this high, war impacted, base and inflation is expected to remain near 4.0% y/y, although slightly below this mark in the main over H2.26.
The expectation is that the war will end within the next few weeks, and this has added to mild interest rate hike expectations, but a more severe war in the Middle East would see significantly higher interest rates (not our expected case).
The environment the fuel price increases occur in is also important, with last year seeing GDP growth doubling, although this was driven to a large degree by agriculture as weather conditions turned favourable after an intense drought.
This year, weather and agricultural conditions are unlikely to prove substantially more favourable than last year, limiting GDP growth to still around 1.5% y/y for 2026, while infrastructure improvements build in freight and energy (electricity).
The war has taught SA the importance of energy security, and the downstream refining and creation of feedstock from oil represents a huge growth industry for the country, along with the extraction of its own oil and gas off the West Coast.
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