US President Donald Trump has wasted no time in signing a slew of executive orders with direct (mostly adverse) consequences for the global economic landscape. It remains to be seen to what extent the more extreme of these measures are curtailed by the US Congress or courts. What is clear, though, is that the trend towards geoeconomic fragmentation and protectionism is becoming more entrenched.
It is also clear that SA has attracted Trump’s specific attention. The potential loss of $440m in the US President’s Emergency Plan for Aids Relief (Pepfar) aid this year is one of numerous adverse implications. The programme plays a significant role in SA’s HIV/Aids healthcare programme, but our government should be able to fund the shortfall.
Unfortunately, the potential bad news does not end there. There is now growing concern that SA’s participation in the US African Growth & Opportunity Act could be revoked. This does not imply that SA exporters will no longer be able to access the US market. However, the price competitiveness of the SA exports covered by the agreement would be negatively affected, which could weigh on the rand exchange rate.
Whereas these developments have, deservedly, grabbed the headlines, it is the US president’s tariff war threats that highlight the shift towards a more fractious and protectionist global environment. Adjusted tariffs will affect the international economy, including SA. Assuming the temporarily suspended 25% trade tariffs on Canada (with some differentiation as the proposed tariff increase for energy-related products is 10%) and Mexico go ahead, as well as the 10% tariff imposed on China, this would add about 0.75 of a percentage point to US inflation.
A full-scale trade war would be especially damaging globally, but Trump is probably using the threat of tariffs largely as an instrument to secure non-trade concessions. We are therefore sticking with our base case, which is for more moderate tariff increases than we are hearing about at the moment, and that these will increase US inflation by about 0.3 of a percentage point.
Global outlook
Trump 2.0 represents a significant shift in US foreign policy thinking. For decades, US presidents have promoted democracy, globalisation and integration to drive development around the world; in the coming years, the US will put up barriers and refocus internally. The world is moving from a dominant single superpower to two spheres, one linked to the US, and the other to Brics.
We will be watching inflation and interest rates closely. The disinflation momentum we saw in early 2024 is slowing across major developed economies. By December, the US Federal Reserve (Fed) had raised its forecast for the core personal consumption expenditures inflator, a key measure of domestic inflation, by 0.3 of a percentage point to 2.5% to accommodate the likely disruptive effect of tariffs on inflation and interest rates.
Loose fiscal policy and a tight labour market have been among the main challenges to the US inflation outlook, and past inflation episodes around the world were linked to unsustainable government spending. In the longer term we see a large budget deficit in the world’s largest economy due to mandatory programmes that account for about 60% of government expenditure.
The US labour market is contributing to inflationary pressure. Indicators such as job openings, long-term unemployment and the “quits rate” suggest the US labour market is in better balance entering 2025. However, the unemployment rate remains low at just 4.1%, with average hourly earnings trending at a firm level.
The Fed is not in a hurry to cut interest rates again; there is too much uncertainty around tariffs and changes to economic policies, and what these mean for inflation and the interest rate outlook. Besides, the US economy surprised on the upside throughout last year.
Geoeconomic and geopolitical tension have shifted foreign direct investment in strategic sectors away from emerging markets and back towards the US.
This economic resilience is partly explained by the wealth effect from buoyant US financial markets and legislative responses to global geopolitical fragmentation. Two acts introduced during former president Joe Biden’s term — the Chips and the Inflation Reduction acts — contributed to a US manufacturing construction boom.
Geoeconomic and geopolitical tension has shifted foreign direct investment in strategic sectors away from emerging markets and back towards the US.
US import statistics show that Mexico and certain European economies benefited as the US sourced technology products from markets other than China.
The dollar remains strong and appears comfortable in its “global reserve currency” role — for now — but the erosion of free trade and threats against Fed independence raise questions about the dollar’s continued reserve currency status. A gradual shift away from the dollar into other assets or currencies is possible in time, though there is no natural alternative yet.
Protectionist shift
As the world adapts to “America First”, geopolitics and protectionism, SA analysts are embracing the possibility of higher domestic GDP growth over the medium to long term. The economic reform programme introduced under the government of national unity is beginning to gain momentum and will be crucial for our economic and financial market development.
Increased protectionism and geoeconomic fragmentation are likely to worsen the trade-off between global growth and inflation over time, heightening the need for SA to implement economic reforms to lift its potential growth.
These reforms, coupled with longer-term growth initiatives under Operation Vulindlela, are necessary to undo the growth “drag” caused by excessive government consumption, high interest rates, infrastructure constraints, load-shedding and sovereign debt downgrades.
However, South Africans should not expect an overnight investment boom. The economic reform process requires legislation to open the way for private sector participation in the economy. We will not suddenly see a burst of new investment.
Domestic inflation is under control, but economists will be watching rand volatility with some concern. We are not seeing a lot of inflation pressure, but, while there is a bit of room for the Reserve Bank to cut interest rates further, we expect it to remain on hold for a while. If our base case on the US holds, the Fed could cut rates once or twice more this year, allowing the Reserve Bank to follow suit. However, it seems we are near the end of the rate-cutting cycle.
Globally, increased spending on climate change and defence is expected to boost metals and mineral demand, which is good news for SA. The dearth of investment in global mining relative to GDP could support commodity prices over the medium to long term and help underpin the rand. More and more commentators believe we can get the economy to grow at 3% in the longer term. We will not jump there immediately, but we should start to drift in that direction over the medium term.
GDP growth and spending restraint are non-negotiable for SA to rein in its fiscal debt. Increased protectionism and geoeconomic fragmentation are likely to worsen the trade-off between global growth and inflation over time, heightening the need for SA to implement economic reforms to lift its potential growth. It is only through higher growth that we can fund the required infrastructure and social expenditure.
• Kamp is chief economist at Sanlam Investments.
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