As we enter the final quarter of 2026, the global economy continues to navigate one of its most complex environments in years. While global growth has proved more resilient than many anticipated, the ongoing conflict in the Middle East remains a significant source of uncertainty and risk.
A protracted war
Earlier this year, we outlined four potential scenarios for the conflict. Two of those were quickly discounted. A rapid de-escalation became increasingly unlikely given the entrenched positions and personalities involved, while a contained conflict proved unrealistic as both sides expanded their objectives and the geographic reach of the disruption grew.
As a result, the world has largely been operating under a “protracted disruption” scenario, which remains our base case with a likelihood exceeding 80%. Under this scenario, the conflict will continue to act as a potential headwind to global growth while simultaneously adding inflationary pressure through higher energy prices, supply chain disruptions, and elevated shipping costs.
However, we must not discount the risk of a severe escalation scenario. Recent developments suggest that this probability may have increased to above 20%, particularly as new parties enter the conflict. Groups such as the Yemeni Houthis have intensified their attacks on the key alternative shipping route of the Strait of Bab el-Mandeb, Saudi Arabia’s 1,200 km East-West pipeline, and other strategic infrastructure across the region, including commercial airports.
Any further disruption to energy supply channels would have significant implications for oil prices, global inflation, and investor sentiment. The United States (US) will feel this, particularly ahead of November’s US mid-term elections where rising US fuel prices remain a politically sensitive issue. In addition, due to supply constraints, China has announced a halt to the export of refined petroleum products until its inventories recover to target levels, which has rattled energy markets and will eliminate a critical source of flexible global supply, especially in the Asia and Oceania regions.
Inflation remains the key policy challenge
The knock-on inflation effect of the war continues to be the dominant concern for central banks globally as higher inflation will impact rate outlooks and constrain growth within economies.
However, the persistent higher inflation is not solely a consequence of higher oil prices. Shipping flows have been disrupted, and although traffic through strategic routes such as the Strait of Hormuz has recovered somewhat from the lows recorded earlier in the conflict, volumes remain well below historical norms. In addition, the increased geopolitical risk has resulted in rising fuel prices, longer routes around Africa as ships bypass the Middle East, and increased war-risk insurance and surcharges, resulting in elevated freight rates, which continue to place upward pressure on supply chains and the cost of goods globally.
Against this backdrop, the US Federal Reserve and other global central banks have resumed hiking interest rates, and we expect further tightening over the next 12 months as policymakers seek to restore price stability amidst inflation levels sitting above target for most major economies. This policy is arguably counterintuitive, because it is not about reducing demand, but rather about combatting supply shocks, which can negatively impact growth by increasing borrowing costs, depressing business sentiment and reducing consumer spending in an already strained environment.
Efficiency gains offer a long-term positive
Interestingly, oil shocks can offer opportunities. Historically, major energy crises have forced businesses and economies to become more efficient consumers of energy. The oil shocks of the 1970s and 1980s accelerated significant improvements in energy productivity, while the era of globalisation temporarily reduced the urgency of such adjustments.
Today, a similar pattern appears to be unfolding. The intensity of energy consumption across several major economies is once again improving, with businesses investing in more efficient production processes, alternative supply routes, and innovative technologies. Over time, these improvements may partially offset some of the economic costs associated with sustained geopolitical instability, resulting in a more constructive growth outlook than many feared earlier in the year.
Global growth proves more resilient than expected
In an environment where broader global growth is remaining remarkably resilient, and while growth is expected to moderate in many regions most major economies should gradually trend back toward their potential growth rates over the next year. We agree with the International Monetary Fund’s projection that suggests that global growth will slow modestly compared with expectations at the start of the year but should remain near 2.5% over the coming 12 months.
United States – the engine of global growth
The US economy continues to outperform its peers and is a key driver of global growth. There are currently three key pillars which are giving the US a competitive advantage:
1. Technology and AI investment
Capital expenditure in technology, particularly artificial intelligence (AI), remains one of the most important drivers of US growth. AI-related investment has become a major contributor to US economic activity, corporate profitability, and employment creation through its multi-industry ripple effect.
The magnitude of this investment cycle is significant. Current estimates suggest that without the surge in AI-related capital spending, US GDP growth would likely be closer to 1% rather than the approximately 2.5% that we are currently seeing. This highlights the increasingly important role that technology investment will play in sustaining economic momentum.
2. Manufacturing and industrial recovery
US business activity indicators remain encouraging. Surveys from regional US Federal Reserve (Fed) banks continue to point towards healthy business conditions, with manufacturing and industrial production having shown a meaningful turnaround during 2026. Despite manufacturing representing a smaller share of the modern US economy than in previous decades, the recovery in US industrial activity is providing an additional layer of support to broader US economic growth.
3. Consumer spending
The US consumer remains a critical driver of US economic activity. Despite pressure from inflation and higher interest rates, retail sales and consumption spending have remained relatively resilient over the year. In addition, the labour market is also providing support to the consumer, with unemployment remaining near historic lows. One of the key enablers of US employment is AI-infrastructure development. These AI-related sectors have become an increasingly important source of job creation, helping offset any weakness in other parts of the economy.
However, there are signs that consumers are starting to feel some strain. Savings rates have fallen towards multi-decade lows, while delinquencies on auto loans have risen above levels experienced during the Global Financial Crisis. Housing activity has also weakened as mortgage rates have moved sharply higher alongside longer-term interest rates. These developments suggest that consumer spending may come under pressure and contribute less to US growth in 2027, especially if inflation remains elevated and US monetary policy restrictive.
Our forecast for US growth of approximately 2.2% over the next 12 months is actually below the economy’s current pace of expansion. This reflects our expectations that tighter monetary policy, persistent inflation, and rising borrowing costs will gradually slow US economic activity.
Europe – facing structural headwinds
While the US continues to outperform, Europe remains challenged by a combination of cyclical and structural factors, and although consumer and business confidence have improved modestly, economic growth remains subdued.
The region continues to struggle with weak productivity growth, ageing populations, shrinking labour forces, and high energy costs. In addition, Germany, traditionally Europe’s industrial powerhouse, faces a number of challenges. Its industrial output continues to decline while productivity growth remains weak, and rising labour costs, energy constraints, and demographic pressures have eroded some of the country’s historical competitive advantages in its manufacturing outputs, including its motor industry, which is facing stiff competition from China.
While the eurozone has been given a fiscal boost through increased defence spending, this will only provide a temporary boost to activity during 2026. However, this support is expected to peak over the next year and gradually become a drag on growth over the medium term as financing costs and supply constraints take hold.
Due to the pressures on European economies, we expect the region to continue to underperform the US, with average growth expected to remain around 1.2% per annum over the next three years.
China – exports continue to prop up growth
Amid these geopolitical shifts, China continues to position itself as an increasingly influential global economic and political power.
Despite widespread concerns about tariffs, geopolitical fragmentation and deglobalisation, global trade volumes have remained surprisingly robust. We are seeing countries and corporations adapting to changing geopolitical realities, with routes changing, regional blocs becoming more important, and emerging economies playing a larger role in global commerce. As such, rather than declining, trade flows have remained stable and the evidence is now suggesting that rather than retreating, globalisation is simply evolving.
Interestingly, despite higher tariffs and greater trade tensions since US President, Donald Trump’s first term, the US has not materially increased its share of global exports. This highlights the complexity of global supply chains and demonstrates that trade patterns often adapt rather than contract when faced with policy barriers, and what we have seen is that China’s US trade has been offset by China’s other trading partners.
However, China’s growth is still relying on its exports as local consumer demand remains subdued, meaning the country is relying on external demand to make up for a lack of domestic consumption, and its housing market continues to contract. In addition, retail sales, fixed asset investment and industrial production have all fallen short of market expectations. Despite export demand remaining robust, the downside risks continue to provide headwinds for economic growth. We expect Chinese policy to ratchet up in an effort to support local demand and stabilise local economic activity with growth north of 4% per annum over the next three years.
South Africa – reform momentum meets a challenging global backdrop
South Africa entered 2026 in a significantly stronger position than anticipated. The local economy had benefitted from 2025’s favourable commodity cycle and improved government finances, which allowed policymakers to pursue a more prudent fiscal path. This fiscal discipline, combined with South Africa’s removal from the Financial Action Task Force grey list, alongside an improving perception of the local economic environment among international rating agencies, provided important support for investor confidence and contributed to the resilience of the rand.
However, the local environment has become more challenging over the course of 2026. While fiscal prudence remains in place, the country is increasingly facing the consequences of a weaker global growth environment, elevated inflationary pressures, and many of the tailwinds that supported the economy in 2025 have gradually turned into headwinds, putting a strain on growth and raising concerns about the sustainability of the fiscal outlook over the medium term.
Economic growth remains under pressure
South African growth in the second quarter of 2026 was disappointing, which reinforced concerns about the country’s ability to generate meaningful economic momentum. Key sectors such as mining, manufacturing and trade all experienced notable contractions. This is particularly concerning given that these industries are traditionally viewed as important drivers of economic activity, employment and export earnings. The weakness across these sectors underscores the fragile nature of the current recovery and highlights the impact of both domestic constraints and slowing global demand.
From a demand perspective, economic activity remains subdued. Household consumption continues to face significant pressure, while government spending is constrained by fiscal realities, including a weaker rand, a more negative commodity cycle and falling tax revenues. Although consumer spending managed to record modest positive growth during the second quarter, it is not enough to offset the weaker underlying conditions.
Agriculture no longer provides the same support
Agriculture, which has been one of South Africa’s most reliable growth contributors over the past few years, has also begun to lose momentum.
The sector’s contribution to GDP growth has moderated as producers contend with increasingly challenging operating conditions, uncertain weather patterns, ongoing disease management concerns and rising input costs, all of which are weighing on activity. Furthermore, disruptions linked to the ongoing Middle East conflict have contributed to higher fuel, fertiliser and logistics costs, creating additional pressure on farming profitability and production levels.
While the sector remains an important driver of the economy, its contribution is likely to be smaller in future.
Inflation and interest rates remain key challenges
Inflation continues to present a major challenge for South Africa’s economic outlook. Both international and domestic factors are contributing to the local inflation risk. Higher global energy prices, supply-chain disruptions and increased transportation costs are directly feeding into increased prices.
As a result, inflation has remained uncomfortably above the South African Reserve Bank’s preferred target range, prompting the Monetary Policy Committee to raise interest rates once again at its most recent meeting. South African Reserve Bank estimations are that inflation will remain elevated throughout 2027.
Elevated inflation puts an additional layer of pressure on South Africa’s consumer-driven economy. Consumers are being forced to grapple with elevated costs of day-to-day goods, high interest rates, and rising fuel costs, along with persistently high unemployment. Together, these factors are eroding disposable incomes and limiting the ability of households to meaningfully contribute to the country’s economic growth.
Investment remains the missing ingredient
As we have highlighted in past editions of Citation, one of the biggest hurdles to sustainable growth is the lack of investment into the local economy. Gross fixed capital formation, arguably the most important driver of sustainable economic growth, remains well below the levels required to generate meaningful economic expansion. While there has been a slight improvement in investment activity, fixed investment as a percentage of GDP remains below 14%.
To understand what this number means, when we look at economies that sustain growth of more than 3% to 4%, they have done so on investment levels upwards of 35% of GDP. That means that at current levels, we cannot envisage South Africa achieving growth much above 1% on a sustained basis.
To change this, the economy needs to attract significantly greater private-sector participation and investment. This requires not only policy certainty but also consistent execution of structural reforms that encourage capital deployment and business confidence. However, while the environment is challenging, there are reasons for cautious optimism.
Reform progress is visible but slow
Several reform initiatives are beginning to yield tangible results. Electricity generation capacity has improved significantly compared with the crisis conditions experienced in previous years. Rail freight volumes are showing signs of stabilisation following years of decline, and the Public-Private Partnerships participation in port infrastructure is starting to improve their operational efficiency, reducing vessel waiting times by 75% according to the National Treasury.
These developments demonstrate that structural reform can deliver results. However, infrastructure turnaround strategies typically require several years to produce meaningful economic benefits.
The challenge remains maintaining the momentum that has been built and ensuring that reform implementation continues uninterrupted. This requires political stability and the continuation of the Government of National Unity (GNU) in its current form.
Politics may overshadow policy
The success of the GNU has thus far been underpinned by a commitment to structural reform and pragmatic policymaking. Maintaining political cohesion within the coalition framework will be critical if South Africa is to continue building on the progress achieved over the past two years.
However, as South Africa approaches the November local government elections, there is a growing possibility that political considerations could begin to dominate policymaking. This could not only destabilise the GNU but also slow reform implementation, as has historically occurred during election periods when attention shifts towards political dynamics and electoral outcomes.
South Africa’s medium-term outlook
The medium-term outlook is constructive. If political stability can be maintained, reform momentum sustained and private-sector investment encouraged, South Africa has the potential to move onto a stronger growth trajectory over the next two to three years. The foundations for a more competitive and resilient economy are gradually being laid. The challenge now is ensuring that reform execution continues at a pace sufficient to unlock the country’s long-term growth potential.
In the short term, though, our expectation remains that South Africa will struggle to generate economic growth of much more than 1% over the next 12 months.
CAM – investment implications
The global economy enters the final quarter of 2026 in better shape than many anticipated at the start of the Middle East conflict. Growth remains resilient, corporate earnings are broadly supportive, and technological investment continues to drive productivity and innovation.
However, risks remain elevated. The Middle East conflict continues to present an asymmetric risk to markets, particularly through energy prices, inflation, and supply chain disruptions. At the same time, slowing consumer momentum, higher interest rates, and political uncertainty ahead of the US mid-term elections and the local municipal elections warrant careful monitoring.
For investors, this environment reinforces the importance of diversification, quality assets, and a long-term perspective. While geopolitical shocks can create short-term volatility, the underlying resilience of the global economy, the ongoing AI investment cycle, and continued adaptation by businesses and consumers suggest that opportunities remain available for disciplined investors willing to look beyond immediate headlines.
Harold Strydom will outline CAM’s medium-term High Conviction Scenario in his Asset Class Views article.
