As the US-Iran war approaches the 90-day mark with tentative signs that the US and Iran are edging towards a deal which would keep open the strategic Strait of Hormuz, the markets look poised for a relief rally. But with President Donald Trump famous for whipsaw pronouncements, it will be some time before anyone uses the word “peace” confidently.
Over the past month, global commentary has seesawed between warnings that the world is on the cusp of the largest energy crisis in modern history, with draconian fuel rationing just weeks away, and reports that a deal between Iran and the US is imminent, suggesting that the global economy could be headed for a soft landing after all.
At the time of writing, the risks remained elevated. Much now depends on whether diplomacy can prevent a temporary energy shock from becoming a more lasting economic one.
“A credible peace deal would significantly reduce the risk of further inflation shocks, aggressive interest rate hikes and a deeper economic downturn,” says Bureau for Economic Research (BER) chief economist Lisette IJssel de Schepper.
That said, even if crude oil prices do ease following a credible peace agreement, South African motorists are unlikely to see an immediate return to pre-war fuel price levels. While a deal would take a severe economic downturn off the table, it would not simply reset the economy back to where it stood in January.
All this heightened uncertainty has made economic forecasting extremely difficult. Many domestic economists have adopted a relatively sanguine view that anticipates only a modest rise in South African inflation and interest rates, and a small hit to growth this year.
In its revised forecast released in early May, the BER reduced its 2026 GDP growth forecast by 0.5 percentage points from 1.8% to 1.3%.
The anticipated growth slowdown is driven partly by an expected drop-off in consumer spending, to 1.8% in 2026 from 3.6% last year. The BER estimates that higher fuel prices could add roughly R45bn in fuel costs to the economy in the second quarter alone, relative to the first quarter of 2026, with nearly 70% of that additional cost burden coming from diesel, not petrol.
The petrol price, excluding the government’s fuel levy relief, has risen by 47.7% between March and May and the diesel price, excluding relief, by 93.4% (see graph).
If there is a confirmed peace deal, crude oil prices should tumble rapidly. However, the BER’s Tracey-Lee Solomon notes that refined fuel prices will likely adjust far more slowly because the market will still be digesting supply and logistical challenges, including damage to refining infrastructure, shipping delays, limited storage capacity and production bottlenecks.
Refineries dependent on imported crude may also continue facing feedstock shortages until global supply chains normalise. In addition, the conflict has introduced a persistent geopolitical risk premium into both crude and refined fuel markets. This means prices may settle structurally higher than before the war.
After the latest CPI print, which climbed from 3.1% in March to 4% in April year on year, driven largely by higher fuel inflation but also by rising core and services inflation, the BER upped its 2026 average inflation forecast from 3% to 4.2%. It expects CPI to drop back to about 3% in 2027.
This means that, having previously expected three 25 basis point (bp) cuts from the Reserve Bank this year, the BER now expects at least one 25bp hike.
“Any hike would be aimed less at the current fuel shock, which higher interest rates cannot fix, and more at preventing second-round effects from taking hold,” says the BER’s IJssel de Schepper.
But she adds that the need for additional tightening could fall away relatively fast if energy markets stabilise quickly and inflation expectations remain contained.
A credible peace deal would significantly reduce the risk of further inflation shocks, aggressive interest rate hikes and a deeper economic downturn
— Lisette IJssel de Schepper
Momentum Investments’ forecast revisions are similar to the BER’s: its 2026 inflation forecast has been raised from 3.2% to 4.3% and its 2026 growth forecast lowered from 1.5% to 1.2%.
That said, Momentum does not expect a quick capitulation by Iran, given the extent of leverage it holds over the Strait of Hormuz. But while it assumes the conflict will drag on, this occurs with limited damage to energy infrastructure in the Gulf.
“At this stage, America has not used ground troops and has not gone after the enriched uranium, which in our view would be an escalation in the war. Similarly, they have not extensively damaged energy-related infrastructure in Iran as yet,” says Momentum group economist Sanisha Packirisamy.
“We would see developments of this nature as red flags leading us into a more severe scenario, which would keep the international price of oil elevated for longer.”
Momentum currently puts the probability of this happening at less than 20% but warns that if more permanent energy-related damage occurs in the Gulf, this will rachet up quite quickly.
In that event, short-term direct stimulus measures by the South African government — such as the R17.2bn fuel levy relief being provided between April and June — would not be enough to offset the inflationary impact, especially as longer-term structural reforms (such as increasing refining and storage capacity and moving freight from road to rail) would not yet be in play.
“As a result, inflation outcomes would reach higher levels for longer and monetary policy would have to tighten to defend the inflation target and prevent inflation expectations from becoming unhinged,” Packirisamy says.
Citi economist Gina Schoeman is more bearish. At the start of the year, her inflation forecast was also low enough to envisage the Bank cutting rates three times this year. Now she expects three hikes based on the expectation that CPI will average 4.4% in 2026 and remain elevated at 4.7% in 2027.
Citi now foresees Brent crude oil peaking at just under $120/bbl in June, before slowing to below $100/bbl by the year-end. Its forecasts also factor in the negative impact of higher fertiliser prices and the building El Niño weather pattern, which is typically negative for Southern African summer crops.
So, just how bad could things get for the South African economy?
“Bad could be close to zero real GDP growth or maybe even a recession if oil prices remain above $90/bbl through 2026, El Niño hits hard, and oil supply becomes a global problem,” says Schoeman.
“Then not only is the supply shock having an impact on demand, but monetary policy has to tighten and fiscal policy has to loosen, which ultimately adds [to South Africa’s] risk premium.”
Even so, she thinks the bar is set fairly high against the global or domestic economy falling into a recession, noting that global growth has remained resilient at around 3% since Covid despite many other crises, including the Russia/Ukraine war and Trump’s “liberation day” tariff shock.
Codera Analytics CEO Daan Steenkamp is perhaps the most bearish of those interviewed. While he expects CPI to average above 4.5% in 2026 (almost one percentage point higher than he projected before the war), he warns that it could average over 5% this year if Codera’s severe scenario plays out.
Codera’s base case is that the conflict will be resolved in the third quarter, allowing South Africa to avoid a recession. But should tensions in the Middle East persist through 2026, and the rand exchange rate shift to a depreciating trend, Codera fears the repo rate would likely have to rise by more than 100bp.
The market currently expects the Bank to begin tightening in May, with forward rate agreements pricing in a cumulative 75bp to 100bp of hikes during 2026.
Codera’s analysis suggests that monetary policy is not as tight as the Bank assumes and that it has been underestimating underlying inflationary pressures in the economy. This means it will likely need to tighten policy by more than it presently believes is necessary to achieve the inflation target.
IJssel de Schepper says the reason the BER hasn’t moved to a recession-and-runaway-inflation forecast is that oil markets still have buffers: strategic reserve releases, China’s stockpiles, demand destruction and eventual supply responses.
Granted, those supply buffers are being run down, which is why the risks are clearly skewed to the downside. “But a $200 oil scenario still requires a sustained and broad physical disruption, not just geopolitical fear,” she says.
A peace deal would likely obviate the risk of further inflationary shocks and thus the need for aggressive interest rate hikes. But IJssel de Schepper warns that it would not simply reset the global, or South Africa’s, economy to where it stood before the conflict began.
Some of the damage has already been absorbed through higher fuel costs, weaker confidence, disrupted trade flows and tighter financial conditions. So, though the war may end, its economic aftershocks are likely to linger well beyond the ceasefire.
Bisseker is an economics writer and researcher at the BER
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