Is there optimism or pessimism now about the economic and business outlook? As South Africa reaches the midpoint of 2026, the economy finds itself navigating a far more challenging environment than many anticipated at the beginning of the year.After signs of a modest recovery in late 2025 and early 2026, renewed geopolitical tensions, rising energy prices and heightened global uncertainty have interrupted that momentum. As the resilience of the world economy continues to be tested, the key question is whether this represents a temporary setback or the beginning for South Africa of a more prolonged period of weak growth.Though Middle East geopolitical events undoubtedly continue to complicate the outlook, South Africa still retains the capacity to strengthen its economic performance through sound domestic policy. The country’s economic prospects over the remainder of 2026 will ultimately depend on how effectively it responds to external shocks while maintaining confidence in its own reform agenda. As a small open economy and a net importer of oil, global shocks are quickly transmitted through higher fuel prices, imported inflation, exchange rate pressures and weaker investor confidence. The recent Middle East conflict has illustrated how geopolitical events rapidly translate into higher business costs and reduced household purchasing power. Global shocks compress profit margins from both directions: they increase operating costs while simultaneously weakening demand.Despite these headwinds, the domestic economy has not come to a standstill. South Africa has economic buffers and resilience to draw upon. Real GDP expanded by 0.5% during the first quarter of 2026, supported by sectors such as finance, agriculture, trade and transport. Household consumption, government spending and exports also contributed positively. Nevertheless, the more important question is not whether South Africa is growing, but whether it is growing fast enough. Unfortunately, it is not yet doing so.Growth remains trapped for now within a narrow corridor of between 1% and 2%, well below the level required to meaningfully reduce unemployment or encourage sufficient investment. My expectation is that South Africa will now show economic growth of about 1.2% to 1.3% this year — slightly stronger than 2025 but below the earlier budget assumption of 1.6%. This represents improvement, but not the breakthrough needed to fundamentally alter the country’s economic trajectory. Experience has consistently shown that periods of highly elevated policy uncertainty discourage investment, reduce employment creation and weaken overall economic growthInflation has also become more challenging. Earlier this year, inflation had moderated to about 3%, aligning with the South African Reserve Bank’s new inflation target. However, renewed energy price pressures quickly pushed headline inflation higher, placing additional pressure on households and businesses. Unsurprisingly, the Reserve Bank responded by raising interest rates by 25 basis points in May and has signalled that borrowing costs may remain elevated until inflation expectations are firmly contained. Higher interest rates may be necessary to preserve price stability, but they also raise financing costs for businesses and consumers at a time when growth remains sluggish.These developments have inevitably prompted questions about the possibility of “stagflation”. While South Africa is experiencing weaker growth alongside rising inflation, current conditions do not yet constitute entrenched stagflation. The economy is better described as facing a temporary period of “low growth combined with higher inflation”, largely driven by external supply-side shocks. The direction of global oil prices and the volatile rand over the coming months will remain the most important variables determining to what extent these pressures intensify or gradually ease. Confidence presents a similarly mixed picture. Business confidence improved significantly during the first quarter of the year before retreating as global uncertainty intensified. This illustrates an important distinction between business confidence and investor confidence. Business confidence reflects short-term trading conditions that keep firms operating on a day-to-day basis. Investor confidence, by contrast, concerns long-term decisions to expand productive capacity through new factories, offices and equipment. Such investment requires confidence that policy settings will remain reasonably predictable in the longer term.It is here that South Africa continues to face one of its greatest economic challenges. The country invests far too little. Fixed investment currently amounts to only about 14% of GDP, far below the roughly 20% required to achieve the GDP growth of 3.5% that the GNU wants by 2030. South Africa cannot consume its way to prosperity. Much higher investment remains the missing engine of faster, more inclusive growth. A critical determinant of investment remains economic policy certainty. Businesses can work around weak policies, but they will “wait and see” when the policy environment becomes highly unpredictable. This is precisely why the NorthWest University Business School’s Policy Uncertainty Index has become such an important barometer of economic performance. Experience has consistently shown that periods of highly elevated policy uncertainty discourage investment, reduce employment creation and weaken overall economic growth. Improving policy certainty is therefore not merely desirable — it is essential for unlocking stronger private-sector investment. South Africa’s labour market continues to reflect the consequences of insufficient growth and the skills “gap”. Official unemployment has risen above 32%, while youth unemployment remains exceptionally high. Without sustained economic growth above 2% together with structural reforms, the economy simply cannot absorb enough new entrants into the labour market. Labour-intensive sectors such as tourism, agriculture, construction, small business and manufacturing must therefore become central pillars of future growth strategy if unemployment is to be reduced. Attention will now increasingly shift towards October’s medium-term budget policy statement, which will be judged less by individual spending measures than by whether it further reinforces fiscal credibility. Slower economic growth this year inevitably complicates the government’s efforts to stabilise public debt and contain debt servicing costs. Maintaining market confidence will require continued fiscal discipline, alongside reforms capable of lifting long-term growth. Looking ahead, the remainder of 2026 is likely to be characterised by a contest between continuing geopolitical uncertainty and South Africa’s underlying domestic resilience. External headwinds remain salient, but domestic policy choices still matter enormously. Recent positive signals from key international credit rating agencies demonstrate that progress is recognised when credible reforms and projects continue to be implemented.Ultimately, the golden thread running through every major economic challenge confronting South Africa remains stronger, more inclusive growth. Growth does not solve every social problem, but it makes most other socioeconomic goals easier to achieve — from reducing unemployment and poverty to strengthening public finances, enhancing social stability, and improving living standards.There remain reasons for cautious optimism. Economic recoveries are seldom linear, and temporary global interruptions need not become permanent reversals. If South Africa continues to strengthen policy credibility, maintain reform momentum and encourage investment, the global headwinds will give way to renewed recovery. As the economic historian David Landes once wisely observed, well-informed, eyes-open optimism is ultimately more productive than unmitigated pessimism in shaping the road ahead.Parsons is a professor at the NorthWest University Business School. This article is based on a recent public address to the University of the Western Cape.Business Day