By Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole & Ame Muller
Household consumption continued to provide important support to South Africa's economy during the first half of 2026 (1H26); however, the income base underpinning that spending appears to be narrowing. While labour income continued to expand, employment contracted materially, suggesting that consumption growth is increasingly being supported by income gains among employed households rather than broad-based improvements in labour-market participation.
Aggregate compensation of employees (CoE) increased nominally by approximately 2.7% over 1H26 (relative to 4Q25), while employment declined by roughly 360 000 jobs over the same period. This divergence helps explain why household spending has remained relatively resilient despite clear signs of labour-market weakness. Rising incomes among employed workers have continued to underpin aggregate consumption, even as job losses have reduced the number of households benefitting from those gains. Importantly, this pattern suggests that aggregate income growth may overstate the strength of household finances, as fewer households are participating in that growth.
The sectoral picture reinforces this point. Trade, catering and accommodation provided the broadest support to household incomes, recording growth in both compensation and employment. Manufacturing also achieved gains across both measures despite a challenging operating environment. Because income gains in these sectors were accompanied by job creation, they likely made a relatively stronger contribution to household spending during 1H26.
Elsewhere, income growth became increasingly concentrated. Transport and communication recorded the strongest compensation growth during 1H26 despite declining employment. Utilities and finance displayed a similar pattern, with CoE growth outpacing employment performance. While this supported aggregate earnings, it suggests that a greater share of income gains accrued to existing employees rather than being distributed through broader hiring. As a result, labour-income growth became less widely shared across households. Construction remained the clearest area of weakness, experiencing both declining compensation and substantial employment losses, consistent with the subdued investment environment.
These labour-income dynamics are consistent with recent spending patterns. Households continue to participate in the economy, but spending decisions appear increasingly influenced by affordability, necessity and value considerations. This is characteristic of an environment in which labour-income growth remains positive, but the distribution of those gains becomes progressively narrower.
Importantly, this analysis focuses solely on labour income, which remains the largest component of household income and typically accounts for around two-thirds of household primary income. It therefore excludes developments in non-labour income, which has generally been a brighter spot for households since the pandemic. Strong asset-price performance, investment returns and other non-labour income streams have likely provided an additional buffer to household finances and helped sustain spending despite labour-market weakness. The forthcoming South African Reserve Bank Quarterly Bulletin should provide a more complete picture of household disposable income and the relative contribution of labour and non-labour income sources.
Overall, 1H26 points to a consumer sector that remains resilient, but increasingly reliant on income growth among a narrower base of employed individuals. Household spending continues to support economic activity, yet the divergence between labour-income growth and employment trends suggests that this resilience is becoming less broadly distributed across households. Demand for essential goods and services should therefore remain relatively well supported, while a meaningful recovery in discretionary spending is likely to remain constrained. Nevertheless, easing inflationary pressures and lower borrowing costs should provide a more supportive backdrop for household spending over the medium term.
Week in review
South Africa's gross foreign exchange reserves increased to $76 billion in August 2026 from $73.5 billion in July, reaching the highest level since May. The increase was mainly driven by a higher US dollar gold price, the maturity of forward exchange contracts used for liquidity management, and favourable valuation effects from movements in foreign exchange rates and asset prices. These gains were partially offset by foreign exchange payments made on behalf of the government. Gold reserves rose to $17.99 billion from $16.38 billion, foreign exchange reserves increased to $51.26 billion from $50.41 billion, and Special Drawing Right (SDR) holdings edged up to $6.70 billion from $6.67 billion. Meanwhile, the forward position declined to $0.57 billion from $1.19 billion, reflecting a reduction in unsettled forward and swap transactions.
Real GDP growth moderated materially to -0.2% quarter-on-quarter (q/q) (seasonally adjusted) in 2Q26, down from 0.4% q/q in 1Q26. On an annual basis, growth moderated to 0.9% year-on-year (y/y), from 1.9% y/y in the previous quarter, with year-to-date growth at 1.4%, ahead of our full-year forecast of 1.2% for 2026. We expect economic growth to stabilise from 2H26 onwards as the impact of the Middle East-related shock fades, financial conditions become less restrictive and domestic confidence improves. Over the medium term, we expect growth to gradually move towards 2.0%, supported by lower inflation, eventual monetary-policy easing and progress on structural reforms.
The FNB/BER Building Confidence Index edge up to 40 points in 3Q26, from 38 in the previous quarter, indicating a modest improvement in sentiment across the building sector, although business conditions remain challenging overall. Activity stabilised after a weak second quarter, with residential building showing signs of recovery and demand conditions improving, while non-residential building activity weakened further amid lower profitability and subdued confidence. Encouragingly, quantity surveyors reported their strongest confidence levels in nearly a decade and architects recorded stronger activity, suggesting that the pipeline of future building work is improving. Despite ongoing pressure from input costs and intense tendering competition, respondents expect both residential and non-residential activity to strengthen in the coming quarter, supported by relatively stable order books and improving project pipelines.
The current account switched from a surplus of R181.6 billion in 1Q26 to a deficit of R205.5 billion in 2Q26. As a percentage of GDP, the current account balance deteriorated from a 2.3% surplus in 1Q26 to a 2.6% deficit in 2Q26. This was driven by a significant narrowing of the trade surplus from R428.8 billion to R146.4 billion, as the value of merchandise imports increased more than that of merchandise and net gold exports. Exports of goods and services increased by R92.3 billion, reflecting higher prices and volumes, while imports of goods and services rose by R376.6 billion, driven by increases in both volumes and prices. In addition, the deficit on the services, income and current transfers account widened from R247.2 billion to R351.9 billion, largely reflecting a larger primary income deficit. South Africa's terms of trade also deteriorated as import prices increased more than export prices.
Mining production (not seasonally adjusted) declined by 7.5% y/y in July, following a 4.3% contraction in June. Seasonally-adjusted mining output declined by 1.9% month-on-month (m/m), down from 0.1% in June. The largest negative contributors were Platinum Group Metals (PGMs), iron ore, and coal. Overall, mining output declined by 5.5% in the three months ending in July compared to the previous three months.
Manufacturing output (not seasonally adjusted) increased by 1.1% y/y in July, following a 1.8% contraction in June. Seasonally-adjusted manufacturing output, which is important for assessing quarterly GDP growth, expanded by 2.2% m/m in July, following 0.8% expansion in June. The near-term outlook for manufacturing has improved following the stronger July production data, but a sustained recovery is not yet assured. Weak domestic demand, elevated production costs, infrastructure constraints and subdued business activity continue to weigh on the sector.
Weekly Round-Up: Economics from Broader Africa
Economic developments across Africa continue to reflect a mix of resilience and emerging risks. Strong external-sector performance in countries such as Nigeria and Ghana is being supported by higher commodity prices, robust export earnings and improved foreign-exchange inflows, while Namibia's reserve position remains broadly healthy despite a wider trade deficit. Policy focus has also shifted towards strengthening macroeconomic stability, with Botswana addressing liquidity pressures in the banking system and Mozambique advancing discussions with the International Monetary Fund (IMF) on a potential Extended Credit Facility (ECF) programme. Elsewhere, Lesotho's textile sector is showing signs of recovery amid improving external demand, while Eswatini remains better positioned to navigate potential drought conditions than during the 2015/16 episode. In contrast, Zambia's Purchasing Managers' Index highlights near-term weakness in private-sector activity, although business confidence suggests conditions could improve following the elections. Overall, the regional outlook remains supported by stronger commodity markets and improving policy frameworks, but vulnerabilities linked to energy prices, weather-related shocks and domestic demand conditions warrant close monitoring.
