News24 | Izak Odendaal | How surging fuel costs are hitting SA’s economic growth

South Africa’s economy contracted in the second quarter largely due to the spike in global fuel prices. Fuel prices have surged again in recent weeks, putting renewed downward pressure on economic activity in South Africa and the rest of the world. The expected acceleration in local economic growth is therefore likely to be delayed, but not permanently, says Izak Odendaal.

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Fuel costs in South Africa spiked in the second quarter, contributing to a decline in inflation-adjusted economic growth. Unfortunately, the war between the US and Iran is escalating again, and crude oil prices hit triple-digit levels again last week.

Iran’s allies, the Houthis, have seized a strategic Red Sea port, which could further disrupt shipping, while Saudi Arabia’s East-West pipeline was shut after a drone strike. All this is compounded by Ukrainian attacks on Russian refineries, further reducing the worldwide availability of refined products.

Therefore, after declining in July and August, local petrol and diesel prices increased sharply in August and September, with another increase looming in October, based on the current daily under-recovery. As chart 1 shows, that will push the real price of petrol and diesel back towards June’s level. This will squeeze household finances and business margins.

Chart 1: South African retail petrol and diesel prices, adjusted for inflation.

Source: CEF, Stats SA, Symmetry calculation

According to Stats SA, real GDP declined by 0.2% in the second quarter after the first string of six consecutive positive quarters since 2016. Compared with a year ago, the economy was still 0.9% larger. This means the underlying growth trend is around 1%, which is not exciting by global standards, but still represents an improvement from the dismal trend of around 0.5% over the previous decade.

Unfortunately, renewed fuel price pressures mean the expected growth acceleration is unlikely to materialise for now. While deferred, the dream is not dead.

Chart 2:South Africa’s economic growth.

Source: Stats SA. Axis truncated around the pandemic

The GDP contraction in the second quarter was due not only to fuel price effects but also to weaker production in the mining and manufacturing sectors. These tend to be volatile at the best of times, and one shouldn’t read too much into a single quarterly decline.

For the mining industry, elevated commodity prices mean firms have every incentive to increase production, rather than cut back output due to a lack of demand. For manufacturing, it is more difficult to be unambiguously positive as South African factories have limited exposure to the AI capex boom that is driving strong output growth in other countries.

Meanwhile, the automotive industry, one of the biggest manufacturing sectors, faces increased competition from China and US tariff headwinds. Upbeat car sales numbers suggest that household finances are not as precarious as is often noted.

However, as chart 3 shows, a big gap has opened between local sales of new vehicles, which expanded at a robust 12% year-on-year in August, and local production levels.

Chart 3: South Africa’s automotive trends.

Source: Stats SA, Naamsa

Beyond the quarterly volatility, the bigger picture is that mining and manufacturing output have been stagnant for years. Both sectors are key to the national economy and job creation, but are hampered by infrastructure bottlenecks.

While load shedding is largely a thing of the past, electricity prices continue to rise rapidly, making some forms of manufacturing activity, notably smelting, uncompetitive.

As much as politicians love talking about the dream of adding value to, or beneficiating, South Africa’s mineral wealth, that dream must also be deferred until electricity is affordable.

Eskom has offered special tariffs to keep some of the smelters afloat, but the latest proposed 9% increase for everyone else is still three times the Reserve Bank’s inflation target. Ultimately, only meaningful competition can stabilise prices.

Crucial reforms

This is why the reforms currently under way are so important. The plan to separate transmission from electricity generation is still on track to be completed next year. It has been slow going, but unbundling a 100-year-old vertically integrated monopoly is no simple exercise.

Eventually, all power generators should be able to access the grid and compete on a level playing field, completely reshaping the electricity market in the process.

A similar process is under way in the key logistics sector. On its own, Transnet cannot move the country’s mineral output and needs outside support. It has similarly been split into a Rail Infrastructure Manager (TRIM) that owns and manages the tracks, while Transnet Rail Freight runs the trains. TRIM is opening access to its rail network for private companies to operate trains.

Ditto for the ports, where the Transnet National Ports Authority owns the infrastructure, but port operations (the loading and unloading of ships) will increasingly be done by private entities, including experienced international players.

The Durban Container Terminal 2, the biggest in the country, is now run by a joint venture between Transnet and a private company from the Philippines. There have been teething problems, but also progress, with the World Bank and S&P Container Port Performance Index showing the Port of Durban as the most improved port in the world in 2025.

Restructuring the logistics sector has been a slow process, but Transnet is also a century-old monopoly. And while there have been some obstacles to reforms in logistics and electricity markets, they have faced remarkably little political pushback. Only a few years ago, anything that looked like privatisation would have been taboo.

Today, it is largely taken for granted that opening space for private participation in these crucial network industries is necessary to unlock investment and improve operational performance.

A few weeks ago, President Cyril Ramaphosa launched Phase 3 of the Government Business Partnership. It somewhat flew under the radar, but marks growing improvement in the relationship between the state and business, which will help to cement important reforms and create a platform for responding to unforeseen future events. This relationship largely broke down in the 2010s, and its impact on the economy and investment climate was notable.

While government and business perform different roles in society, collaboration is necessary to achieve faster and more inclusive growth. Their partnership is structured around three broad pillars:

• First, electricity and logistics, the “growth enablers”.
• Second, the “growth sectors”, areas where there is the potential to expand investment and employment, notably mining, agriculture, tourism and infrastructure.
• The third pillar consists of “confidence multipliers” – changes that will improve the general investment climate, specifically tackling crime and corruption, and addressing the challenges in major municipalities such as Johannesburg.

The last is crucial, since Johannesburg is responsible for a sizable portion of national economic activity. While welcome, the partnership between the government and business will not make much headway in this area if there isn’t stable and committed leadership at the metro level. Johannesburg has had nine mayors in 10 years, and it is no wonder that the City has deteriorated rapidly in terms of its finances and infrastructure. The main thing investors will want to see from the upcoming local government elections is therefore the emergence of more stable municipal coalitions.

Fiscal consolidation

Also looming is the Medium-Term Budget Policy Statement in October. It should show continued modest progress in fiscal consolidation, that is, stabilising debt levels.

Tight fiscal policy is never politically popular, but it is being maintained despite the November election. Although some political parties are making big promises, there is very little that can be called populism or vote-buying giveaways. This contrasts with countries like Brazil, where analysts are concerned that fiscal policy is being loosened ahead of next month’s presidential election.

Even more egregious was US President Donald Trump’s promise of a $5 000 “dividend” to all American adults if the Republican Party maintains control of Congress after the midterm election.

While unlikely to materialise, this naked attempt at vote buying would cost around $1.3 trillion. This at a time when the US government’s borrowing levels are already alarmingly high and the benchmark 10-year US Treasury yield is approaching 5% for the first time in 18 years.

South Africa’s progress in fiscal consolidation has already reduced the government’s borrowing costs over the past two years, which also lowers hurdle rates for new investments by the private sector. The decline in South African government bond yields is even more striking, considering how much yields in developed countries have increased. The South African government, therefore, currently pays the smallest “spread” over equivalent US government bond yields since 2007, as chart 4 shows.

However, the relentless rise in government bond yields across developed countries means public finances are in the spotlight everywhere. In a higher-for-longer global interest rate environment, South Africa cannot afford to backtrack on its fiscal consolidation efforts or the reforms to raise economic growth. In an uncertain global environment, it becomes more important for South Africa to get its own house in order and develop its own growth drivers that do not depend on what other countries do.

Chart 4: SA and US government borrowing costs.

Source: LSEG Datastream

Global markets are going through a volatile patch as interest rate expectations shift and geopolitical risk is rising again. This is spilling over to local shores in the form of higher fuel costs, but the impact on local bond and equity markets could also rise. However, local markets still offer reasonable value, and with an improving medium-term economic outlook, patient investors can still earn decent real returns in the years ahead. The key, as always, will be to not overreact to short-term market moves or disappointing economic data.

Izak Odendaal is an Old Mutual Wealth Investment Strategist. News24 encourages freedom of speech and the expression of diverse views. The views of columnists published on News24 are therefore their own and do not necessarily represent the views of News24.