South Africa's economy appeared to be gaining solid momentum during the first quarter, with the latest PayInc economic index pointing to faster activity in March and raising expectations of a reasonably strong GDP print before the impact of rising oil prices and broader geopolitical risks.
Speaking to CNBC Africa, independent economist Elise Kruger said the March reading of the PayInc economic index came in stronger than expected, rising 0.9% month on month from February and 4.6% higher than a year earlier. Data show that economic activity remained resilient in the early months of the year, supported by a favorable mix of low inflation, prior interest rate cuts, improved confidence and still supportive external conditions.
“The first quarter turned out to be a good quarter for the economy,” Kruger said, adding that South Africa could still see “a fairly good GDP figure in the first quarter” before the negative effects of the Middle East conflict become more prevalent.
While Kruger cautioned that the PayInc index is not a one-to-one proxy for GDP, he said it remains a useful directional gauge. With the index showing quarter-on-quarter growth of about 0.9% in the first quarter, he indicated GDP could deliver a similar positive number, echoing the expansion seen late last year.
The strong first quarter backdrop was driven by several tailwinds that lasted from late 2025 to early 2026. Chief among them was reducing inflation, which touched what Kruger described as the “sweet spot” of 3% as recently as February. The low inflation environment means that wage growth is running above consumer prices, effectively giving households real wage gains and increased purchasing power.
Furthermore, earlier cuts in interest rates continued to support consumers and businesses, while confidence indicators improved on both the household and corporate side. Kruger said rising optimism has likely encouraged more investment spending by companies and a greater appetite among consumers for sustainable goods.
External factors also helped. The rand remained relatively strong during the quarter and high commodity prices continued to support the economy. Together, those factors created a broadly constructive environment for activity during the first three months of the year.
But that momentum now faces more uncertainty heading into the second quarter.
Kruger warned that rising fuel prices linked to the Middle East conflict and higher oil prices are likely to significantly alter the favorable inflation outlook from the start of the year. He said the rise in petrol and diesel prices will start getting reflected in April inflation data and is likely to lead to a broader increase in prices across the economy.
According to Kruger, the shock to fuel costs will not be a one-time event. He said further increases may occur in May and June, which will put continued pressure on headline consumer inflation. With transportation and logistics costs rising sharply, businesses may struggle to absorb the hit, raising the possibility that higher input costs will be passed on to consumers in the form of broad-based price increases.
This could create a more difficult backdrop for policymakers. While interest rates are likely to remain unchanged in the near term, Kruger said an inflation shock could ultimately provoke a response from the South African Reserve Bank, depending on how policymakers interpret the durability of price pressures.
Its basic forecast is cautious. Kruger said he had already cut his growth outlook for the year to 1.1% from 1.6%, which puts him closer to the International Monetary Fund's 1% projection. He said he now expects zero growth in both the second and third quarters as the economy absorbs the impact of higher energy costs and weaker activity.
Kruger also created the possibility of two 25-basis-point rate hikes in May and July in his scenario. In their view, inflation could average between 4.2% and 4.4% in 2026, a level that could be of concern to the central bank if fuel price pressures increase.
This view runs contrary to hopes in some corners of the market that the Reserve Bank might pay attention to an oil shock, especially if it is considered externally induced and temporary. The host of the interview pointed to recent comments by IMF Managing Director Kristalina Georgieva, in which she suggested that central banks should remain calm and avoid panic tightening in response to rising oil prices.
Beyond the key growth and inflation discussion, the PayInc report also highlighted the ongoing structural shift in the way South Africans transact. Kruger said that as the economy moves toward a more digital and cash-light environment, the use of cash is decreasing.
He said the PayInc Cash Index breaks down the picture into several components, including cash inventories, cash supplied to the industry and demand for cash among the public. While overall supply-side trends show a decline in cash use, one notable detail was that demand for cash in the hands of consumers still increased, suggesting that cash remains relevant in some parts of the economy despite the expansion of digital payments.
Kruger said the move away from cash is likely to continue in the long term due to convenience, security concerns and costs associated with handling physical money. At the same time, he suggested that a completely cashless model remains controversial, especially in a market where some consumers still rely on cash transactions.
For now, the main takeaway from the March PayInc data is that South Africa entered the year in a stronger position than many expected. However, the durability of that strength will depend on whether consumers and businesses can withstand the coming wave of fuel-driven inflation without a sharp slowdown in spending, investment and confidence.
The first quarter may have provided a welcome relief. However, the second quarter is shaping up to be a much tougher test for the economy.