POWER FAILS TO IGNITE SA GROWTH, WHILE US PULLBACK LEAVES EUROPE TO PLAY DEFENCE

This is an extract from the Weekly Review of 7 March 2025. The full Weekly can be found here (for free, but sign up if you want to receive notifications of new editions and other BER publications)

The Week In Perspective written by Lisette IJssel de Schepper

Most of the domestic data releases were a bit disappointing. The week started with another below-50 Absa PMI print, with the S&P Global PMI on Wednesday also stuck in negative terrain in February. From a GDP growth perspective, while the economy rebounded from the 0.1% quarterly contraction in Q3, the 0.6% recorded in Q4 is hardly something to celebrate. Indeed, while the consumer was strong, as expected, and there was an uptick in private sector fixed investment after three quarters of decline, the overall print was uninspiring. The fact that the annual economic growth rate slowed to 0.6% from 0.7% in 2023 is bleak. Unfortunately, the RMB/BER Business Confidence Index (BCI) for Q1 does not point to a strong further recovery in Q1, with sentiment unchanged at 45 index points. To be fair, activity ticked along, so the economy may, too, in Q1, but it certainly does not point to a meaningful acceleration. On the bright side, local vehicle sales did well in February, but exports slumped. This does not bode well for the Q1 current account, which stayed in deficit in Q4 – although coming in smaller than expected.

On the global front, following initial delays, US tariffs of 25% on most Canadian and Mexican imports came into effect on Tuesday, and an additional 10% was imposed on China. This impacts about $1.5 trillion in annual imports. The day before, the US S&P500 saw the worst sell-off of the year when US President Donald Trump confirmed that the 25% tariffs against America’s biggest trading partners would definitely happen. Indeed, since the start of his presidency, bonds have now performed better than equities, with the S&P500 having wiped out all of the gains since the elections. Canada was quick to implement targeted countermeasures. China retaliated by, among other measures, imposing levies of up to 15% on some US agricultural products. Trump says that more tariffs are to come, including the reciprocal tariffs expected in April, defending the use of tariffs in general during his address at a joint session of Congress. However, US Commerce Secretary Howard Lutnick said that the US could walk back some tariffs on Mexico and Canada. Indeed, American car manufacturers were later exempt from the 25% tariff for a month. Additionally, ?Lutnick yesterday suggested that all goods that met the rules of the 2020 free trade deal would be granted a one-month reprieve. Trump later confirmed this arrangement for Mexico and Canada. Still, despite two U-turns in policymaking, concerns that the tariffs may hurt US growth mean that traders have now added to expectations of US rate cuts in 2025, with three 25bps cuts now fully priced in and the first cut possible in May. This is despite a likely tariff-induced uptick in inflation.

Last Friday, during an awkward exchange (from an outsider’s perspective at least) between President Trump, his Vice President JD Vance, and the Ukrainian President Volodymyr Zelensky, the countries ended up not signing the minerals deal. Trump ordered a pause in all military aid to Ukraine. The aid will remain suspended until Trump decides that a good-faith commitment to peace has been made. The US also said America would stop intelligence-sharing with Ukraine. Ukraine reportedly sent a letter to the US that it would be willing to sign the minerals deal and talk about peace.

European stock markets hit record highs early this week as leaders committed to ramping up defence spending and supporting Ukraine. Defence stocks surged, with the German DAX rising by 3.4% on Monday—the biggest one-day increase since 2022. Later in the week, European stocks moved lower amid concerns that the continent could be Trump’s next target, with European automakers, especially under pressure. However, reports that the German chancellor-in-waiting seemed to have the support to essentially change the constitution to allow for increased borrowing for infrastructure and defence spending were seen as a positive for the region (and the euro, which strengthened significantly against the dollar). German bond yields spiked, which filtered through global bond markets and pushed the Japanese 40-year bond yield to the highest level since its inception in 2007. Even in the US, where worries about the impact of tariffs on the economy initially pushed bond yields lower, they rose later in the week. Meanwhile, the European Central Bank (ECB) cut its policy rate for a sixth time since June last year, but it is less certain how it will proceed from here with the US pulling back from Ukraine and European countries seemingly ready to spend more on defence.

In China, the government announced it would again target ‘about 5%’ growth in 2025. It did, however, lower its inflation target from 3 to 2%, which is the lowest target in 20 years. Still, given that consumer inflation averaged 0.2% over the past two years, it will not be easy to reach 2%. The 5% growth target will also not be an easy feat and will likely require significant stimulus, especially with the possibility of a trade war weighing on growth. Indeed, the country raised the headline budget deficit target from 3% to 4% of GDP – the highest level in about three decades - ?and said it would increase its defence budget.

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Editor: Lisette IJssel de Schepper Email: [email protected]

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