SA’s 3% growth dream remains distant as economy battles to gain momentum

Finance Minister Enoch Godongwana remains hopeful that South Africa can achieve 3% economic growth, but for now the country must contend with an economy still struggling to gain momentum.

Despite the government’s ambitions to accelerate growth, the gap between its targets and the economy’s current performance remains a major challenge. Real gross domestic product (GDP) grew 1.4% year-on-year in the first half of 2026, but contracted in the second quarter after fuel prices spiked.

Godongwana forecasts real economic growth of 1.2% in 2026, down from the 1.6% projected in February. He delivered the medium-term budget policy statement (MTBPS) on Wednesday.

South Africa’s economic outlook

National Treasury noted that the country’s economy has shown resilience amid price and other economic shocks stemming from the conflict in the Middle East.

Godongwana cautioned that a prolonged Middle East conflict, along with El Niño and its likely impact on producer costs and output, could further weaken domestic growth.

“Domestic economic activity has already lost some momentum, especially in export-linked sectors,” the minister said.

Economic growth is expected to reach 1.6% in 2027 and 2% by 2029, but it is still a long way from the desired 3%.

South Africa’s resilience

The minister said fiscal discipline and a lower inflation target are helping to contain borrowing costs and reduce the country’s risk premium. The rand has strengthened and become less volatile.

“This reflects the difficult choices we have made to preserve macroeconomic stability and fiscal sustainability,” said Godongwana. “But growth remains too low.”

To address slow economic growth, Godongwana has a plan. “The government is focused on accelerating implementation of structural reforms coupled with strengthening state capability and delivering public infrastructure. This will put the economy on a faster, more sustainable growth trajectory.

“If we stay the course, growth could exceed 3% per annum,” he said.

Municipalities blamed for sluggish economic growth

National Treasury said it is addressing challenges with electricity, logistics and water; however, municipalities continue to fail to deliver basic services, hamstringing economic growth.

“Longstanding constraints in electricity, logistics and water are being addressed, while local government service-delivery failures continue to limit economic growth and job creation.

“Comprehensive implementation of structural reforms will benefit the growth outlook, but this requires coordinated action.”

The medium-term growth strategy rests on four pillars: maintaining macroeconomic stability, implementing structural reforms, strengthening state capability and supporting growth-enhancing public infrastructure investment.

Oil shock

According to Treasury, the International Monetary Fund (IMF)’s October 2026 outlook forecasts South Africa’s 2026 growth at 1%, despite the oil price shock and its effects across the economy.

“The IMF’s downward revision for emerging market and developing economies as a whole has been more pronounced, averaging 0.8 percentage points of lower growth. South Africa’s performance is consistent with the increased stability achieved in recent years: a lower inflation target, a narrower deficit, stabilised debt and a lower risk premium have left the economy better placed to absorb external shocks.”

Treasury added that the oil price shock pushed inflation above the 3% target, and forecasts a return to the target only in 2029.

“Should the shock persist, it could keep upward pressure on interest rates. In combination with the rising primary balance, lower inflation would contribute to investment, growth and job creation.”

Risks to economic growth

National Treasury said risks to the outlook are tilted to the downside.

“A prolonged stalemate or escalation of conflict in the Middle East could keep energy prices high and inflation elevated, while a reassessment of AI investment could tighten global financial conditions.

“Domestically, infrastructure bottlenecks, weak confidence and limited fiscal space leave little room to cushion further shocks. Conversely, a quicker resolution to the war, faster reforms or improved state capability could lift growth above current forecasts.”

Core problem

Business Leadership South Africa (BLSA) CEO Busisiwe Mavuso said the core problem remains the country’s slow economic growth.

“Treasury cut its 2026 forecast to 1.2% from 1.6% in February and projects 2% only by 2029. Godongwana reaffirmed that the government’s strategy for faster growth and healthier public finances remains anchored on four pillars: maintaining macroeconomic stability, implementing structural reforms, building state capability and supporting growth-enhancing infrastructure.

“Faster economic growth is the best way to address South Africa’s severe unemployment crisis. This is a long-term process, which is why every effort to accelerate delivery matters, especially on structural reforms and infrastructure.”

Unemployment increased to 33.6% in the second quarter of 2026.

Water challenge to be addressed

Mavuso welcomed Godongwana’s reaffirmation to address water woes, which includes reducing water losses, improving revenue collection and reforming how water infrastructure is financed.

In electricity, he reaffirmed that restructuring Eskom and establishing an independent transmission operator will support a more competitive market, attract new investment in generation and accelerate expansion of the grid.

On infrastructure, he pointed to the new Infrastructure Finance and Implementation Support Agency, which consolidates existing units and is already supporting projects with a potential investment value of more than R207 billion.

What needs to happen

“Raising the rate at which the economy can sustainably grow requires maintaining macroeconomic stability and accelerating progress on structural reforms, state capability and infrastructure investment,” said Treasury.

“The second-quarter contraction was driven mainly by trade rather than a broader loss of domestic demand, but growth remains well short of what is needed to durably reduce unemployment and poverty.

“Inflation is above target, fiscal risks persist, and the reform agenda in energy, logistics and water remains incomplete. Sustaining resilience and turning it into durable higher growth depends on faster implementation across all four growth pillars.”