Soft landing, hard test: The global economy and South Africa navigate the oil shock

OIL SHOCK ROCKS A STEADYING BOAT

The global economy delivered a stronger-than-expected first quarter in 2026 (Q1-26). Growth beat consensus across major economies while inflation continued to ease slowly, a combination that vindicated the soft-landing narrative that had gained traction in market thinking since late 2025. The drivers were well established: Artificial intelligence (AI)-related capital expenditure (capex) maintained the extraordinary pace set in 2025, fiscal support in both Europe and the US provided a reliable floor under demand, and US business confidence posted its first sustained improvement in over a year. The latter was a development that markets had been waiting for, signalling the prospect of an improvement in labour market dynamics, which were weak in 2025.

The aggregate numbers, however, masked some imbalances (Figure 1). US investment growth remained heavily concentrated in a narrow band of technology and AI-adjacent sectors, lacking breadth across the remainder of the economy and indicative of weak confidence. The consumer picture was equally bifurcated: headline demand held up, but, increasingly, because higher-income households were in a financially strong position, benefitting from non-wage income. On the other hand, middle- and lower-income households relied on savings to smooth consumption while the labour market weakened. In the US, labour market dynamics have changed fundamentally: New immigration rules have lowered the breakeven[1] employment rate; hours worked declined, wage growth slowed at the lower end, and temporary employment contracted, while productivity increased. Household liquidity and wealth remain concentrated in a relatively small consumer base.

The escalation of conflict in the Middle East arrived late in the quarter. The accompanying oil price spike was reflective not only of the shock, but, as the conflict progressed, of market concerns about the impact on both inflation and implications for longer-term supply. There is precedent for oil price shocks to fade over a relatively short period of time, but supply concerns have raised growth concerns in addition to the impact on inflation. Markets quickly priced the risk of rate hikes. This has left the outlook for the second quarter (Q2-26) considerably less comfortable than the Q1-26 headline figures implied.

The IMF's April 2026 World Economic Outlook frames the conflict in Iran through what it terms a ‘reference forecast’ – a deliberate departure from its traditional baseline, reflecting the difficulty of anchoring projections to a situation still in flux. The central assumption is that the conflict remains limited in duration, intensity, and geographic scope, with disruptions fading by mid-2026 in line with commodity futures pricing as of early March. On that basis, global growth is projected at 3.1% in 2026 and 3.2% in 2027 – a modest downward revision relative to January, but one that the IMF notes would have been an upgrade absent the conflict. The aggregate numbers are, however, somewhat misleading: The outlook for developed economies is broadly unchanged, supported by the strong start to the year and policy support. Commodity-importing emerging markets, especially Asian economies that import large proportions of their energy needs from the Middle East, are most exposed.

The risk, of course, is that the reference case does not hold. The IMF is explicit that downside scenarios dominate, and the numbers in those scenarios are arresting. Under an adverse scenario with larger and more persistent energy price increases, global growth would slow to 2.5% in 2026. Under a severe scenario involving material damage to energy infrastructure, growth would reduce to around 2% – approaching the threshold that has historically defined global recession.

Recent developments offer tentative grounds for cautious optimism. Reports of progress towards a broader US-Iran agreement and signals that the Strait of Hormuz may reopen in the coming weeks are constructive. The initial energy price spike, while sharp in supply terms, came at a time when global supply was plentiful, which narrows the initial stagflationary impulse. Uncertainty and damage to infrastructure point to Brent crude remaining elevated, settling around US$80 per barrel (pbl) in the fourth quarter of 2026, as the March and April supply contraction and residual damage to energy infrastructure keep prices from fully unwinding. Under this scenario, the drag on growth is real but manageable: A near-term squeeze on household purchasing power and some softening in business sentiment will slow an economy that entered the year with genuine momentum. In the US, a divergent mix of weakening consumption, accelerating business investment, and a rebound from the government shutdown points to a solid 2.5% annualised GDP gain for Q1-26. Globally, China's estimated 4.5% year-on-year (y/y) expansion in Q1-26 and strong growth in global capex confirm that the underlying pulse of the world economy remained strong heading into the shock. Early April regional surveys by the Federal Reserve Board (the Fed) lend some support to this view: Output expectations dipped below trend, but hiring and capex intentions remained more constructive, a split that argues for a soft patch rather than a reversal.

INFLATION SPIKE PROMPTS CAUTION, FLEXIBILITY

On inflation, the picture is less benign (Figure 2). Global headline CPI looks set to push to at least 3.5% y/y this quarter as energy and goods prices rise. In the US, headline CPI is seen averaging 3.7% (J.P. Morgan estimate), with the core Personal Consumption Expenditures Price Index expected to firm above 3%. Euro area headline inflation is seen above 3% from May 2026 to January 2027. Inflation in the UK is expected to peak a little later at 3.8% y/y in November.

More recently, central banks have pivoted from their initially hawkish post-conflict communications towards a more cautious, data-dependent posture – with the common thread being an unwillingness to rush. We think the Fed will remain in extended pause mode, with policy well positioned to address risks on both sides of its mandate; rate cuts remain a possibility once inflation eases. However, should the economy regain its Q1-26 momentum and the disruption be contained, a strong recovery in confidence and improvement in the labour market could well see the risk shift to hiking from the Fed into year end.

The European Central Bank (ECB) has also moved to a more cautious stance. After markets initially priced an April move, Governing Council members emphasised the need for greater clarity on the size and persistence of indirect and second-round inflation effects before acting. However, the upward bias in policy remains intact, given that energy prices are running above the ECB's baseline assumptions.

The Bank of England is signalling a hold at its upcoming meeting, with the majority of Monetary Policy Committee (MPC) members focused on whether the energy shock transmits into longer-term inflation expectations. The UK is in a more challenging position, with inflation stickier than in the US and Euro area, accompanied by poor sentiment, meaningful fiscal constraints, and weak growth. Across all institutions, the pattern is the same: a supply shock that complicates the inflation picture, a growth outlook that argues for caution, and a preference for waiting on data over acting pre-emptively.

Fiscal policy faces genuine constraints should the crisis become protracted. Global public debt reached 94% of GDP in 2025 and is expected to reach 100% by 2029, driven by the world’s major economies. Most governments have already moved to shield their economies from the near-term impact of the energy shock, with interventions ranging from price caps to fuel-specific tax cuts and, in some cases, targeted support for sectors most exposed, such as transport and agriculture, but these come at a cost. In the US, the fiscal expansion announced in 2025 will continue to provide a fillip for consumer spending in 2026, and Germany’s multi-year infrastructure and defence programme will benefit aggregate demand regionally. But, defence spending is also likely to expand going forward, even as public debt is already high across most major economies, further limiting optionality for governments in the face of heightened uncertainty.

SOUTH AFRICA ECHOES GLOBAL THEMES

Many of these themes echo in South Africa (SA). While GDP growth was just 1.1% in 2025 following a downward revision to GDP, for the third quarter of the year, momentum ended on firmer footing, with GDP growth of 0.4% quarter-on-quarter (q/q) and 1.5% y/y in the fourth quarter of 2025. Activity data for Q1-26 was a bit of a mixed bag, but our estimates are tracking 0.4% q/q and almost 1.9% y/y. Business and consumer confidence also ticked higher, the former responding to better realised and expected business conditions as well as an improvement in the general business climate (Figure 3); while consumers responded to incomes supported by real wage gains, moderating inflation as the currency strengthened, lower oil prices, and incrementally lower interest rates.

In February, National Treasury tabled a constructive Budget, with fiscal metrics set to outperform baseline forecasts, as revenue has run ahead and spending lagged in 2025/2026. We expect a deficit of   -4.2% of GDP, better than National Treasury’s -4.5% estimate. Looking ahead, revenue estimates at the time of tabling were conservative, and expenditure was well anchored by lower inflation (indexing of major discretionary line items), lower debt service costs, and a multi-year wage agreement linked to inflation. National Treasury’s commitment to ongoing primary surpluses, expenditure reviews, and an improvement in the quality of spending should help near-term debt peak in 2025/2026. Politics, while noisy, has seen the Government of National Unity (GNU) settle into a reasonable working arrangement, for now. Benchmarking forecasts to accommodate Q1-26 data would have seen upward revisions to growth and downward revisions to inflation.

The spike in the oil price doesn’t derail this story, but it does introduce material risks. The first is the direct feedthrough to inflation, and the challenging position this puts the MPC in, given its move to a lower inflation target. Oil prices and the currency have an immediate impact on retail fuel prices as these are regulated and adjusted monthly. In April, the government announced a R3/litre reduction in the fuel levy (at a fiscal cost of R6 billion per month), with a 15.1% increase in the petrol price and 39.8% in the diesel price, combining to increase April’s fuel CPI by 18.5% month on month.

May recovery rates imply further fuel price hikes, reduced by the relief rally in oil prices, but ultimately, the reintroduction of the levy will need to happen. Public transport prices typically reflect these price changes with a lag, and form part of core inflation. We are also concerned that ad hoc ‘levies’ on certain services to accommodate higher fuel prices could have an impact on price setting. Food inflation has generally trended lower, but as diesel and fertiliser are significant input costs, low selling prices could put meaningful pressure on margins, leading to a reduction in planting/supply come end-2026 planting. This, coupled with the uncertain impact of Foot and Mouth Disease on herds, presents significant upside risk for food prices into 2027. We see headline inflation of 4.2% in 2026, 3.5% in 2027 and 3.6% in 2028.

The South African Reserve Bank (SARB)’s MPC was already concerned about an oil price shock in January, and has modelled a series of risk scenarios that incorporated higher oil prices and a weaker currency. Initially, adverse outcomes fell within the MPC’s tolerance, but a sustained period of oil prices above US$80pbl would likely be more challenging. The MPC has consistently communicated that it would ‘look through’ any first-round effects of such a supply shock, but is simultaneously monitoring for second-round effects. Managing inflation expectations is therefore likely to be a tightrope walk. Last year’s move to a lower inflation target ups the ante and will put pressure on the SARB to remain restrictive and manage expectations as inflation picks up. High credibility helps. Should the truce hold and prices stabilise, we think there is room for the MPC to shift to a more hawkish rhetoric while monitoring the situation. However, should prices settle above US$95pbl for a sustained period, and headline inflation head towards 5% y/y, we think the risk of second-round effects will rise, and the MPC will have to raise the repo rate until headline inflation shifts lower and expectations continue to moderate (Figure 4).

For now, the impact on growth is likely to be contained. An inflation shock is a tax on consumption, and a fuel price spike is hard for consumers to offset in the near term. The longer it lasts, the more disposable incomes come under pressure. The impact on confidence is also key, as households can support spending through credit utilisation, but people will be reluctant to borrow if they see interest rates rise, or expect the broader economy to be affected. On a better note, some tax relief for inflation in the Budget, coupled with better underlying momentum, should provide some cushion to a contained shock to household spending.

PRIVATE SECTOR PARTICIPATION IS CRUCIAL

We think growth momentum will slow into mid-May but not dissipate completely. Private sector capex started to recover in late 2025, and aspects of government’s reform agenda, notably driven by Operation Vulindlela, are moving forward, supporting better investment spending. Having successfully concluded the private partnership for the Durban Pier 2 container terminal in 2025, Transnet is looking to introduce private participation in other ports and open access to the freight rail network in 2026. The Department of Water and Sanitation has introduced critical legislative changes to enable private participation in Water Services Provision. Further, National Treasury’s Metro Trading Services Reform Programme spearheads efforts to drive financial and governance reforms in all eight metros, with an additional R54 billion ringfenced for investment in water and electricity infrastructure at local government level over the next six years. A shift to a utility model for water and electricity in metros should help improve service delivery and strengthen regulation and oversight. These initiatives are being supported by the GNU and should continue into the local elections at the end of 2026. We expect the economy to grow 1.3% in 2026, 1.9% in 2027 and 2.1% in 2028.

The SA outlook encapsulates, in miniature, the central tension defining the global conjuncture: an economy that entered 2026 with genuine underlying improvement – better fiscal metrics, recovering private investment, and early dividends from structural reform – now navigating an external shock with high directional and intensity uncertainty. The oil price spike is not a full-blown crisis for SA, but it is a test of the policy credibility and reform momentum that have been so painstakingly built. The MPC's tightrope walk to deliver sustainably lower inflation, National Treasury's constrained but improving fiscal position, and the GNU's fragile political accommodation all point in the same direction: some resilience earned through discipline, but fragile. If the current conflict in the Middle East de-escalates and energy prices stabilise, SA is well placed to build on the momentum of late 2025. If the shock persists, the buffers are thin.

[1] The pace of hiring needed to keep unemployment stable

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