The recent tariff announcement - dubbed “Liberation Day” - by the United States, has sent shockwaves through global markets.
Source: PwC South Africa.
While certain categories and countries face significantly higher rates, only a handful of exemptions exist. This move constitutes one of the most aggressive tax increases in modern American history and is expected to have profound implications for economic sentiment, consumer spending and global trade dynamics.
Old Mutual Group Chief Economist, Johann Els, says a US recession is now his base case. “The combination of sharp sentiment shocks, declining household wealth and sharply higher import costs is likely to prompt a broader pullback in business investment and hiring,” says Els.
He revised his US GDP growth forecast down from +2.2% in January to +1.5% in March, and now to just +0.9% for the full year.
Although the tariffs may cause a short-term spike in inflation, the broader disinflationary effects of weaker demand are likely to dominate. The US Federal Reserve is expected to respond by holding rates steady at the May FOMC meeting and then initiating a rate-cutting cycle starting in June. This could potentially deliver up to 125 basis points in cuts over the remainder of 2025.
“Depending on the downturn’s severity, front-loaded moves of 50 or even 75 basis points are possible. At the same time I expect the dollar to weaken further, potentially reaching 1.15 to the euro by mid-year and 1.20 by year-end,” Els adds.
From the South African perspective, direct trade exposure to the US is relatively limited. While US data indicates a $9bn trade deficit (equivalent to 2% of SA’s GDP), local figures suggest a more modest $2bn gap.
US trade impact
Els explains: “Precious metals, base metals and vehicles comprise the bulk of SA’s exports to the US, with precious and some base metals notably exempt from the new 31% tariff rate. Imports from the US are concentrated in machinery, electrical goods and chemicals. As a result, the macro-economic impact on South Africa will likely be felt more acutely in specific industries, like agriculture and vehicle manufacturing, rather than across the broader economy.”
Els has also downgraded his growth forecast marginally for South Africa in response to expected softness in US-linked exports. He does not foresee a local recession.
“China and the Euro Area, South Africa’s primary trading partners, are expected to adopt accommodative policy stances, which should help offset lost momentum. Inflation risks have also shifted to the downside, supported by stable oil prices and a potentially firmer rand. If inflation dips below 3% in Q2 and the global rate cycle turns, the SA Reserve Bank may find room to begin cutting interest rates from mid-year,” Els says.
Despite these favourable domestic conditions, Els cautions that the SA Government of National Unity (GNU) still needs to stabilise. The uncertainty around the GNU and the DA’s continued participation in it, are also cause for concern for confidence and investor sentiment. After the formation of the GNU in the middle of 2024, there was improving confidence in the ability of government to implement the right policies to make sure the economy runs stronger.
“As we’ve seen in past periods of global uncertainty, markets do stabilise and sanity eventually prevails. The key is to stay the course and stick to your investment plan. Now is not the time for drastic changes or big investment decisions,” he concludes.
