In July, signs of the US economy slowing became more apparent. US GDP growth for the first half of 2025 came in at 1.3%, a notable deceleration from the 2.8% recorded in the second half of 2024. While some trade agreements, particularly those with the EU and Japan, have been finalised at less punitive levels than initially feared, their dampening effect on growth is still expected to feed through in the second half of the year. Talks with key trading partners such as Canada, Mexico, and China remain ongoing, adding further uncertainty. US labour demand has also softened in line with weaker growth. Optically the unemployment remains stable at 4.2%, but this is largely due to a decline in the Labor Force Participation Rate (LFPR) from 62.7% in July 2024 to 62.2% in July 2025. Adjusting for this decline in the LFPR, suggests the unemployment rate today is closer to 4.5% vs. the reported 4.2%. Further analysis of the jobs data reveals a marked slowdown in hiring in the economically cyclical sectors vs. the public non-cyclical sectors. We expect this slowdown will become more evident in the second half of the year.
The US Federal Reserve now faces a difficult balancing act. On the one hand, slowing GDP would typically call for a rate cut. But the full effect of tariffs, which are inflationary have yet to work their way through the economy. Steady wage growth, and inflation which is still above target, would also not support cuts. With mixed signals, the Fed is holding off for now, opting instead to wait for clearer data.
Meanwhile, US equity markets, particularly the S&P 500, have shown surprising resilience, despite the macroeconomic headwinds. Much of the recent strength can be attributed to a handful of mega-cap tech names, which are investing heavily in artificial intelligence. While monetisation of AI remains uncertain, its longer-term productivity benefits may lift earnings across the broader economy. However, this optimism must be weighed against concerns over the unsustainable and ballooning US fiscal deficit.
The surge in US debt issuance, required to fund widening deficits, is placing upward pressure on yields to entice funding. Complicating matters further, many of the US’s traditional funding partners are ramping up their own spending on defence and infrastructure, reducing their capacity to acquire additional US debt. Geopolitical tensions and concerns about hard currency reserves being frozen are also contributing to reduced demand from certain countries.
The drag from tariffs is expected to weigh more heavily on the US than on the rest of the world and as the US economy loses momentum, the dollar should continue to weaken. In contrast, fiscal policy in Europe, particularly in Germany, and in China is becoming more expansionary, creating a more supportive growth environment outside the US. European equity markets, which trade at far lower valuations and are showing early signs of an upturn in GDP growth, are likely to benefit. For these reasons, opportunities outside the US are becoming increasingly attractive, both from a valuation and risk perspective.
South Africa: fragile path ahead
In South Africa, the South African Reserve Bank (SARB) cut interest rates by 25 basis points in July. However, markets focused more on the Bank’s stated preference for inflation to settle around 3%, signalling an informal shift toward targeting the lower bound of the official 3 to 6% inflation band. Since any formal change in the inflation target falls under Treasury’s jurisdiction and still requires political consensus, uncertainty remains. Structural inflationary pressures, including steep electricity and municipal tariff increases, mean inflation is unlikely to fall below 3.5 – 4% over the medium term.
While lower inflation helps reduce risk premia, currency volatility, and borrowing costs, tighter monetary policy required to achieve this will also suppress growth and strain fiscal balances in the short term. Reflecting this cautious stance, as well as factoring in the impact of the proposed 30% US tariffs on South African exports, the SARB revised its 2025 GDP growth forecast down to 0.9% from 1.0%. However, there is still hope that a trade deal could be reached with the US at a lower 15% tariff level, retaining exemptions for key mineral exports and potentially securing additional concessions.
Despite these challenges, there are incremental signs of structural progress. Transnet has received $5 billion in government guarantees, and port productivity has improved by 21% year-to-date. Freight volumes, especially for coal and iron ore, are also recovering. Encouragingly, South Africa has fulfilled all 22 requirements set by the Financial Action Task Force, putting it on track for removal from the Grey List as early as October.
Commodity prices, particularly for gold and platinum group metals, continue to support the country’s terms of trade and have contributed to a stronger rand. With the national budget now passed, immediate risks to the Government of National Unity (GNU) have subsided, giving way to a fragile but workable truce.
Given the continued uncertain global backdrop, our portfolios remain defensively positioned. We focus on companies offering strong dividend and cash flow yields and robust economic moats.
