The US backpedals on tariffs
The Trump administration appears to be softening its stance, granting tariff reprieves across numerous sectors following meetings with captains of US industry. Automotive part imports became the latest beneficiary at the time of writing. The recovering US market suggests investors anticipate significant moderation of the originally proposed tariff measures.
Despite these developments, the final outcome remains uncertain. While a reasonable base case might involve agreements being reached with many countries, risks of negative outcomes persist. Even if agreements are secured, confidence in their longevity under an erratic administration, remains low.
The prospect of achieving a reasonable trade deal with China seems less likely, given the administration’s long-standing hawkish position toward Beijing, and China’s firm rhetoric about not yielding to American pressure. Chinese officials have proven considerably less accommodating than other US trade partners—possibly less co-operative than the US had anticipated.
Going forward, we may witness continued backpedalling amidst a growing recognition that tariffs are not effective tools for achieving America’s economic objectives. However, it remains reasonable to assume that the US is determined to reduce its dependence on external supply chains, particularly for goods deemed critical to national security—a position actually shared by many opponents of Trump’s broader economic policies.
This approach essentially reverses some globalisation benefits and will inevitably increase costs for consumers and for exports that rely on imported components. Yet remarkably, the S&P500—now just 10% below its February peak—trades at a price-to-earnings ratio exceeding 20 times, well above its historical median, and despite real bond rates surpassing their long-term average. Meanwhile, business and consumer confidence surveys show negative sentiment, and earnings revisions continue their downward trend. Given these factors, we believe greater investment value exists outside the US market.
China’s increasing advances in innovation
China’s economy continues to face headwinds. Declining exports, which have been front-loaded due to tariff concerns, combined with a property sector that remains under pressure, are weighing on GDP growth expectations for this year. Growth projections are now moving closer to 4%, falling short of official targets. The government’s steadfast commitment to achieving 5% growth suggests we may soon see the implementation of stimulus measures to bridge this gap.
However, China’s strategic push to reduce its dependence on the United States is becoming increasingly evident in various sectors. Evidence of Chinese technological advancement continues to emerge, particularly in critical industries. Notably, Huawei is now building foundries capable of producing high-performance semiconductor chips that can compete with the advanced chips that have been banned by the US for Chinese export. These domestically produced chips are already being utilised in Deep Seek’s new model releases, demonstrating tangible progress in China’s quest for technological self-sufficiency.
South Africa backpedals on VAT
The VAT showdown eventually came to a head with the scrapping of the proposed VAT hike. This decision requires a revised Budget, to be presented on 21 May, which will potentially include a reduction to the originally proposed spending commitments of R138 billion given less revenue available. Importantly, government will need to relook at how they balance fiscal priorities.
Meanwhile, the GNU remains fractiously intact for now, although hopefully more focused on the dire consequences of a potential GNU breakdown. Continued internal party jostling is proving unhelpful at a time when South Africa needs steady leadership to navigate the dramatic deterioration in the US-SA diplomatic relationship. The political stability of the coalition continues to be tested during this critical period.
Despite the budget impasse dominating headlines, several economic indicators have shown resilience. February’s retail sales increased by 4.6% year-on-year in real terms, while April’s vehicle sales jumped an impressive 12% compared to the previous year. These positive signals suggest an underlying economic resilience despite the political uncertainty.
Inflation remains contained, with CPI sitting at just 2.7% year-on-year and food inflation marginally higher at 2.8%. The combination of low maize prices and falling oil costs creates favourable conditions for further inflation reduction, further strengthening the case for interest rate cuts in the coming months.
South Africa’s trade account has benefited from both the low oil prices resulting from OPEC’s surprising production increase and the elevated gold price. However, these temporary advantages face significant threats from potential 30% “reciprocal” tariffs from the US and the possible termination of the African Growth and Opportunity Act (AGOA). Such developments would place pressure on both the trade balance and the rand.
Against this complex backdrop, IMF growth forecasts have been downgraded with South Africa’s GDP growth now forecast to grow at a modest 1% this year. This projection may be revised should the Trump administration continue to roll back its global tariff threats. As the international trade environment evolves, economists maintain a cautious outlook on the country’s growth prospects, recognising both the domestic challenges and external pressures that will shape South Africa’s economic trajectory in the months ahead.
