By: Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole, Koketso Mano
As 2024 ended, we knew that the new year would sustain uncertainty and volatility in line with unfolding global fracturing. We were also worried about which campaign promises would materialise in a Trump 2.0 presidency, and we figured that policy uncertainty was sufficiently high, but the way it has been heightened further is unprecedented. The market gyrations over the past few weeks highlight how chaotic the environment has become. It is likely that some level of fatigue will set in and either force the policymakers in the United States (US) to adjust their willingness to impose shock or the markets to recalibrate their risk tolerance. That said, our job is to look through the noise, understanding what fundamentally shifts the outlook.
Tariff stop-starts
Since the beginning of this year, we have had US import tariffs imposed on specific products (vehicles, steel and aluminium) and countries (Canada, Mexico and China). We also had a flat 10% tariff imposed on all trade partners alongside reciprocal tariffs on nearly 60 countries and the EU bloc. The reciprocal tariffs have since been paused for 90 days, leaving some room for intensified negotiations. However, negotiating meaningful bilateral agreements with so many countries may not be practical in three months. The time required will be even longer in instances where there may be a desire to debate deeper policy issues that are regarded as detrimental to the interests and competitiveness of US businesses within trade partner territories. Therefore, without clear guidance from the US administration, several economies may find themselves in a precarious position again in the next quarter.
Macroeconomic implications
Both policy uncertainty and tariffs have weighed on growth expectations. The impact on capital allocation and sentiment has been considerable and the likelihood of a global recession has risen. The growth fears for the US and China are a strong pivot from growth forecasts that were being scaled up coming into this year, and the tariff retaliation that has rapidly escalated between the two largest economies has meaningful implications for global growth. The two economies are also important trade partners for South Africa (SA) and weaker demand will dampen SA's export growth, which will be felt in sectors such as mining and manufacturing. The pause on SA's 30% reciprocal tariff rate means that across-the-board competitiveness of SA goods will not be as affected, especially with a weaker rand. However, the impact on consumer, business, and investor confidence, compounded with prevailing Government of National Unity (GNU) stability risks, will still weigh on SA's growth and investment prospects.
Inflation will likely be a regional issue going forward. While the US will struggle with stickier inflation on account of higher import costs, China's struggle with overcapacity should continue to keep a lid on inflation. That said, weak growth should see easier monetary policy or policy stimulus in both markets. For many emerging markets, trade channels will dictate the net impact on inflation, however, currency depreciation is an immediate risk to inflation expectations. The South African Reserve Bank's Monetary Policy Committee's scenario on loss of preferential access to the US market and 25% tariffs on SA exports reflects confidence loss, a weaker rand, higher inflation, and tighter monetary policy. Therefore, we are likely to see divergent monetary policy responses. Fiscal slippage is also less likely to be easily tolerated as risk aversion and more borrowing in safer destinations weigh on capital inflows.
All these factors dictate that SA having strong leadership and a pragmatic-enough approach to navigating a new domestic political landscape and changing global dynamics is imperative. Any deviation from the reform agenda will stall an improvement in competitiveness and the ability to secure meaningful trade relationships.
Week in review
South Africa's gross foreign exchange reserves amounted to $67.4 billion at the end of March, reflecting a $1.2 billion monthly increase from the end of February. The increase was largely driven by gold reserves, which accounted for 88% of the monthly increase, supported by higher US dollar gold prices. Foreign exchange reserves increased marginally, accounting for 12% of the total rise in gross foreign exchange reserves, aided by valuation adjustments and foreign currency proceeds received on behalf of the government amounting to $216 million. This was partially offset by foreign exchange payments made on behalf of the government.
Manufacturing output (not seasonally adjusted) declined by 3.2% y/y in February, matching the contraction recorded in January, though slightly revised from an initial estimate of a 3.3% decline. Seasonally adjusted manufacturing output, which is critical for the calculation of quarterly GDP growth, grew at a modest pace of 0.3% m/m, following a 0.4% increase in the previous month (revised up from 0.2%). Over the three months to February, output contracted by 2.3%, indicating a potential drag on overall GDP growth in 1Q25.
Week ahead
On Tuesday, data on mining production for February will be released. In January, mining production contracted by 2.7% y/y after contracting by 2.4% in December, reflecting a sharp 15.1% decline in iron ore production, a 4.4% decline in coal production, and a 3.8% contraction in platinum group metals. Seasonally adjusted output fell by 1.2% m/m, underscoring continued weakness after contracting by 3.7% in December.
On Wednesday, data on retail sales for February will be released. In January, sales growth surged to 7.0% y/y, a significant increase from 3.2% y/y in December. Month-on-month sales rebounded by 1.2%, reversing the previous 0.4% decline. This uptick reflected an improved consumer environment, driven by factors such as a recovery in household incomes due to accelerating wages and moderating inflation; lower borrowing costs; and a temporary income boost from the two-pot pension system withdrawals.
Tables
The key data in review
| Date | Country | Release/Event | Period | Act | Prior |
|---|---|---|---|---|---|
| 8 Apr | SA | Gross foreign exchange reserves $ bn | Mar | 67.4 | 66.3 |
| 10 Apr | SA | Manufacturing production % y/y | Feb | -3.2 | -3.2 |
| SA | Manufacturing production % m/m | Feb | 0.3 | 0.4 |
Data to watch out for this week
| Date | Country | Release/Event | Period | Survey | Prior |
|---|---|---|---|---|---|
| 15 Apr | SA | Mining production % y/y | Feb | -- | -2.7 |
| SA | Mining production % m/m | Feb | -- | 1.2 | |
| 16 Apr | SA | Retail sales % y/y | Feb | -- | 7.0 |
| SA | Retail sales % m/m | Feb | -- | 1.2 |
Financial market indicators
| Indicator | Level | 1 W | 1 M | 1 Y |
|---|---|---|---|---|
| All Share | 86,082.52 | -4.20% | -1.70% | 16.20% |
| USD/ZAR | 18.73 | 2.70% | 0.60% | 0.30% |
| EUR/ZAR | 20.7 | 5.10% | 6.10% | 2.30% |
| GBP/ZAR | 24.53 | 3.90% | 3.80% | 3.80% |
| Platinum US$/oz. | 951.75 | -3.80% | -0.50% | 1.20% |
| Gold US$/oz. | 3,115.34 | 1.90% | 7.70% | 35.40% |
| Brent US$/oz. | 70.14 | -5.30% | -2.10% | -21.50% |
| SA 10 year bond yield | 10.03 | 1.10% | 2.10% | -11.90% |
FNB SA Economic Forecast
| Economic Indicator | 2022 | 2023 | 2024f | 2025f | 2026f | 2027f |
|---|---|---|---|---|---|---|
| Real GDP %y/y | 1.9 | 0.7 | 0.6 | 1.6 | 1.7 | 2.0 |
| Household consumption expenditure % y/y | 2.5 | 0.7 | 1.0 | 2.0 | 2.0 | 2.1 |
| Gross fixed capital formation % y/y | 4.8 | 3.9 | -3.7 | 1.4 | 2.7 | 3.8 |
| CPI (average) %y/y | 6.9 | 6.0 | 4.4 | 3.8 | 4.4 | 4.3 |
| CPI (year end) % y/y | 7.2 | 5.1 | 3.0 | 4.6 | 4.2 | 4.3 |
| Repo rate (year end) %p.a. | 7.00 | 8.25 | 7.75 | 7.00 | 7.00 | 7.00 |
| Prime (year end) %p.a. | 10.50 | 11.75 | 11.25 | 10.50 | 10.50 | 10.50 |
| USD/ZAR (average) | 16.40 | 18.5 | 18.3 | 18.4 | 18.6 | 18.9 |
