South Africa's growth stalls as businesses retreat and investor confidence cracks

South Africa’s businesses are pulling back. Investment is falling, confidence is slipping, and the economic recovery that once offered a measure of relief after years of strain is now losing momentum.

The economy grew by 0.5% in the first quarter of this year, extending a run of six consecutive quarters of growth. But the pace is flagging. Real GDP is now expected to track near 1.2% for the full year, a modest figure that reflects tightening constraints rather than robust expansion. More troubling, fixed investment fell in the first quarter despite earlier signals of recovery, a sign that businesses are growing more cautious as borrowing costs rise and uncertainty deepens.

Professional services firm PwC South Africa outlined the shifting landscape in its Mid-2026 economic review, noting that while domestic conditions have improved, the recovery is becoming increasingly uneven and fragile. Business confidence has declined sharply, and forward-looking indicators such as the manufacturing Purchasing Managers’ Index remain only marginally above neutral, suggesting limited optimism about near-term prospects.

The external environment has become the primary driver of South Africa’s economic trajectory. Higher fuel prices, a weaker rand and persistent global uncertainty are squeezing costs and margins across sectors. Ongoing tensions in the Middle East have pushed oil prices higher, weakening the rand and raising input costs throughout the economy. Inflation reached 4% in April, driven largely by transport and energy costs, prompting the South African Reserve Bank to raise its policy rate to 7% in May. Interest rates are now expected to remain elevated for an extended period, limiting the scope for near-term relief.

Lullu Krugel, PwC South Africa’s chief economist and Africa sustainability leader, emphasized that the outlook for the second half of the year hinges on whether external pressures persist and how currency volatility and the cost of capital evolve. Dirk Mostert, the firm’s lead economist and sustainability associate director, added that businesses must now plan for a prolonged period of higher costs and interest rates.

Sector performance reveals a mixed picture. Mining outperformed other sectors, buoyed by strong gold and platinum group metal prices, with mineral sales rising significantly and providing crucial support to export earnings. Consumer-facing sectors including retail, wholesale and motor trade posted solid gains earlier in the year, though this resilience is now being tested as higher fuel costs and borrowing rates erode household purchasing power.

By contrast, manufacturing remains fragile, with only modest output growth and continued pressure from rising input costs. Financial services, a key growth contributor, is entering a more complex phase: higher interest rates support margins but also dampen credit demand and increase risks to asset quality. Construction and infrastructure present one of the clearer areas of potential upside, with government capital expenditure expected to support activity in non-residential building and infrastructure projects.

Elevated commodity prices, particularly for gold and platinum, continue to provide important support to the economy. How durable that advantage proves will be critical to sustaining growth momentum.

Anastacia Tshesane, PwC South Africa’s CEO, noted that the country continues to offer promising long-term opportunities, supported by the depth of its financial system, the scale of its market and the resilience of its private sector. Unlocking that potential, she said, will require rebuilding business confidence and sustaining investment in a more complex operating environment. Clear policy direction, continued public-private collaboration and a stable macroeconomic framework will be essential to support investment decisions and drive inclusive growth.

As the recovery enters this more uncertain phase, businesses face the challenge of managing cost pressures and weaker demand while still investing in future growth. Krugel stressed that this next phase will require careful balancing, with companies needing to navigate a higher-cost, lower-momentum environment while positioning themselves for longer-term expansion. Whether business confidence can be rebuilt quickly enough to prevent investment from sliding further remains the central question hanging over the second half of the year.