Trump’s tariffs and GNU instability

Ask any economist how their week was and the answer will definitely be: what a week! Trump’s tariffs that were on and then off, as well as the instability in the GNU had economists scrambling this week to make sense of stock markets plummeting and the rand reaching a new low.

Tracey-Lee Solomon and Lisette IJssel de Schepper, economists at the Bureau for Economic Research (BER), note that after US president Donald Trump’s reciprocal tariffs kicked in on Wednesday morning, stock markets dived lower and the US bond market reeled.

Despite a generally weaker dollar, the rand weakened to record low levels against the major currencies, with the local bond yield also moving steadily higher. “Just 13 hours later, Trump snapped his fingers and adjusted all the reciprocal tariffs for individual countries to the universal 10% for 90 days,” the BER said.

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Result of Trump tariffs on China

“China was the exception and Trump ramped up the tariff to 125%. In turn, Beijing imposed a 125% tariff on US imports. However, the latest noises from China suggest the country is more open to negotiating than before, although it does not want to be bullied.”

They also point out that the 25% tariff on aluminium and steel exports, as well as 25% on foreign cars also remained. “The tariff on imported cars is set to hurt South Africa, but although it disadvantages cars produced locally, all foreign cars face the same hurdle. On the positive side, the exception for some of our key mineral and metal exports (most notably platinum group metals), seems to hold for now.”

Markets rebounded sharply on Wednesday after the tariff pause was confirmed, triggering the S&P’s biggest one-day gain since 2008 and Apple’s best day since 1998, Solomon and IJssel de Schepper say.

“However, after initially starting on stronger footing, US stock markets again closed in the red on Thursday with the S&P500 down 3.5% on the day and the Nasdaq 4.2% lower. The JSE Alsi suffered steep losses until Wednesday but regained the decline on Thursday to end the week flat.”

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The rand continues to be under pressure

The rand continued to struggle, losing 4.1% against the dollar, 4.7% against the euro and 2.6% against the pound.

The rand slumped to R19.75/$ on Tuesday, its weakest level since late May 2023, but pulled back to R19.29/$ but remains under intense pressure. Other emerging market currencies have fared better than the rand, magnifying the influence of domestic factors.

According to Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, the rand weakened in volatile trade, bogged down by global risk aversion, amplified by South Africa’s political woes.

“Investors are concerned about the stability of the Government of National Unity (GNU), particularly the likely direction of economic policy if the GNU collapses. If the ANC partners with leftist parties, the shift towards more populist policies would hurt confidence and put the rand under even more severe pressure.”

Bianca Botes, director at Citadel Global, points out that amid global uncertainty, emerging market currencies like the South African rand are volatile, reflecting broader risk aversion for most of the week, seeing large swings daily. “The rand hit a low of R19.92/$ earlier this week, before rebounding along with its emerging market peers on the back of a significantly weaker dollar.”

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Gold was the star again this week

The ever-reliable gold rebounded to gain 1.5% and was trading at $3 229.38 per fine ounce and set a fresh record high of $3 214.93 an ounce before trading even higher today, boosted by the flight to safety in global markets.

Botes also believes that gold remains a safe haven of choice for investors.

“Gold is set for its strongest weekly performance since November, reflecting investor caution in the face of escalating global uncertainties.

“Its price soared past $3 200/ounce, reaching a record high as safe-haven demand surged amid trade tensions and a weaker US dollar. The tariff hike on Chinese imports is fuelling concerns over an economic fallout. Inflation risks remain elevated due to intensified trade measures,” Botes said.

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Brent crude oil in trouble?

According to Solomon and IJssel de Schepper, Brent crude fell by 10.6% compared to the previous week, trading in an unusually wide range of $58 to $67 per barrel. “While part of this is due to concerns about demand, a larger than originally scheduled production increase by Opec+ is set to cause a supply glut.”

Matshego and Nkonki say recession fears pushed the Brent crude oil price briefly to below $64 a barrel on Wednesday, its lowest level since April 2021, before it recovered marginally to $66.

Botes says the drop in the price of Brent crude oil marks a second consecutive weekly decline as US-China trade tensions raise concerns about global fuel demand. “The US confirmed tariffs on Chinese imports have been raised to 145%, overshadowing a temporary 90-day tariff pause for other countries. This increase could dampen oil demand from China, the world’s largest importer.”

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Manufacturing production remains weak

On a monthly basis, manufacturing production increased by 0.3% in February, following a revised 0.4% growth in January. However, despite these monthly gains, annual growth is still negative, making February the fourth consecutive month of annual contraction.

Katrien Smuts, economist at the BER, says out of the 10 major manufacturing groups, only one, furniture and other manufacturing, contributed positively to annual growth. The three biggest drags were transport (-1.3%), petrochemicals (-1.2 %) and wood products (-0.3 %.). “The last Absa PMI, albeit remaining below 50 points in March, suggests there could be some improvement next month.”

Mamello Matikinca-Ngwenya, Siphamandla Mkhwanazi, Thanda Sithole and Koketso Mano, economists at FNB, point how that seasonally adjusted manufacturing output, which is critical for the calculation of quarterly GDP growth, grew at a modest pace of 0.3% month-on-month, following a 0.4% increase in January.

However, they say over the three months to February, output contracted by 2.3%, indicating a potential drag on overall GDP growth in the first quarter of 2025.

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Increase in foreign reserves thanks to surging gold price

South Africa’s foreign reserve holdings increased to $68.5 billion in March, up from $66.3 billion in February and well above the expectations of $65.7 billion. Smuts says the key driver behind the stronger-than-expected outcome was the gold price, which continued to reach new highs throughout March.

“As a result, the value of South Africa’s gold reserves increased by over $1 billion, from $11.5 billion to $12.6 billion.”

Matikinca-Ngwenya, Mkhwanazi, Sithole and Mano say the increase was largely driven by gold reserves, which accounted for 88% of the monthly increase, supported by higher US dollar gold prices.