Economic Update June 2026
- Dr Roelof Botha
- 5 hours ago
- 4 min read
The Downside
With the Middle East having provided a paradoxical meaning to the word "ceasefire" and the world's second most important maritime shipping route for oil and fuel remaining at under 10% of its normal operations, it is not surprising that the oil price continues to act like a yo-yo in a range above $80 per barrel.
As a direct result of the ongoing warfare in the Middle East, the petrol price in June was 35% higher than in January, whilst South Africa's inflation rate has jumped from 3% to 4%, prompting the Monetary Policy Committee (MPC) of the Reserve Bank to raise the prime overdraft rate (via the repo rate) from 10.25% to 10.5%. It is entirely predictable that higher interest rates will erode households' spending power, especially those repaying mortgage loans linked to the prime rate.
The MPC's decision last year to abandon the 3%-6% inflation target range and replace it with a 3% target point has come back to haunt the economy. This decision was made at a time when international scholarly research had indicated a move towards greater flexibility in monetary policy in emerging markets, especially towards inflation targeting. It had become clear that central banks need to be more aware of the limits of restrictive monetary policy in combating supply-side cost pressures, such as oil shocks. By removing the tolerance for the inflation target, the MPC has now painted itself into a corner, with the country's households having to bear the cost through lower disposable incomes – at a time when credit extension to households had barely begun to recover from a nine-quarter decline.
Until an effective ceasefire is implemented in the Middle East, economies worldwide will suffer the consequences of elevated transport costs and, in some cases, higher financing costs for individuals and businesses alike.
The Upside
Motor trade powering ahead
South Africa's motor vehicle sector continues to go from strength to strength, with a vastly superior growth performance compared to the GDP. The latter only managed a real increase of 1.1% in 2025, compared with last year's 5% growth rate for the Drive Motor Index (DMI), a composite index measuring the real percentage change in 12 key indicators of the motor vehicle industry.
Despite a noticeable drop in vehicle and component exports, the double-digit growth in vehicle sales values and the number of new vehicles sold has propelled the DMI to a new record high.
Naamsa has reported a year-on-year increase of more than 12% in vehicle sales during the first quarter of 2026, which is far superior to that of most other durable consumption goods. This performance has been made possible by the positive impact of lower credit costs and the influx of a variety of relatively cheap cars imported from Southeast Asia.
Good news from Fitch and Moody's
Progress with the National Treasury's long and arduous path to fiscal stability has paid a welcome dividend in the form of positive revisions by Fitch Ratings and by Moody's Ratings of the country's sovereign credit position. Although the latter firm only raised its outlook, Fitch Ratings raised South Africa's long-term foreign- and local-currency ratings by one notch to BB from BB-, while maintaining a stable outlook – the first upgrade in more than two decades.
The upgrade places South Africa alongside only one other G20 country to receive a ratings upgrade from Fitch this year. It marks a significant turnaround after years of downgrades by major ratings agencies.
Viewed in the context of the latest national budget, the positive shift in the creditworthiness of South Africa's government bonds is unsurprising. According to the latest statistical tables accompanying the annual budget, the return to a primary budget surplus (revenue minus non-interest expenditure) is gaining momentum.
In a statement released by Moody's Ratings, confidence has been expressed in South Africa's ability to maintain the Government of National Unity and, over the longer term, to sustain progress in implementing projects aimed at infrastructure repair and expansion. Specific mention is made of the importance of the crowd in substantial new private investment in the areas of energy, logistics and water.
Rand on top of the world
In May, the South African rand recorded the largest gain of any major global currency against the US dollar, appreciating by 3.5%. In sharp contrast, several of the most-traded currencies suffered setbacks against the greenback, including the Euro, the British pound, and the Indian rupee.
The rand's strong showing in May had nothing to do with a weak dollar, as the world's forex benchmark ended the month on a stronger footing (as measured by the US dollar index, the so-called "Dixie"). Reasons for the extraordinary resilience of the rand remain rooted in a strong balance of payments, in both the current and financial accounts.
On balance, Dr Roelof Botha deliberately emphasises positive news. It often highlights the resilience of the South African economy and the immense scope for new business opportunities.
