Ordinarily, the slowdown in global growth would have caused most central banks to accelerate interest rate cuts. Instead, the number of central banks cutting rates has slowed significantly over the past six months. For example, since the beginning of this year an average of 11 central banks have cut rates each month, compared with an average of 19 banks a month in the previous six months. This moderation in the pace of monetary policy easing is due to a combination of factors, including some upward drift in global inflation, a concern that higher import tariffs could fuel additional price increases, and a more cautious approach by central banks to changes in monetary policy, given the increased uncertainty associated with President Trump’s tariff policy. Fortunately, some economies were able to reduce interest rates appreciably in 2024, which should provide greater monetary policy flexibility during the remainder of 2025.
US economy forecast to grow at its slowest pace since the Covid pandemic
On 2 April 2025 President Trump announced that “reciprocal” import tariffs would be imposed on around 186 countries. While most of these countries were handed a 10% tariff, more than 45 countries, including SA, attracted tariffs greater than 20%. Initially the tariffs were scheduled to be implemented on 9 April, but this was postponed for 90 days to allow for “negotiated trade deals”. At the time the Trump administration spoke about doing “90 deals in 90 days”.
On 7 July Trump announced that the implementation of the “reciprocal” tariffs would be further delayed until 1 August 2025, but sent “letters” to over 20 countries, including SA, outlining the tariff that would apply to them on 1 August unless they concluded a more favourable trade deal with the US.
In the year to date the Trump administration has concluded “trade deals” with Canada, Mexico, UK, Vietnam and China. Importantly, the “trade deal” with China is effectively a temporary (90 day) de-escalation of the trade war between the US and China.
Assuming that all the currently announced reciprocal tariffs are implemented on 1 August (including specific sectoral tariff on vehicles and steel as well as a recently announced 50% commodity tariff on copper), the US’s effective import tariff will increase from less than 3% in 2024 to an extremely high 18%. If sustained, this will have significant implications for the US economy, both in slowing economic activity and increasing inflation, thereby creating an element of stagflation.
In the first quarter of 2025, US GDP declined by 0.5% quarter-on-quarter (annualised), mainly due to a massive 51.6% quarter-on-quarter increase in imports. Understandably, the increase in imports was largely driven by companies increasing inventories ahead of the scheduled tariff hikes.
Encouragingly, the Q1 2025 decline in US economic activity, as well as the increased trade policy uncertainty, has not yet had a meaningful impact on the US labour market, with the rate of unemployment improving to 4.1% in June 2025, although there is increasing evidence to suggest that companies have become more reluctant to increase employment. This is partly reflected in the fact that the US private sector added only 74 000 jobs in June, which was well below the six-month average gain of 142 000 jobs.
In early July, the US Congress approved Trump’s One Big Beautiful Bill Act (OBBBA). The OBBBA contains a very large package of tax and spending measures, which in aggregate will cost the US government around $3.3 trillion over the next decade, excluding interest costs. (These estimates are provided by the Congressional Budget Office.) In effect, the legislation will extend the expiring personal tax cut provisions passed during the first Trump administration in 2017, while adding additional tax reductions for households and businesses. This suggests that the OBBBA should provide some stimulus to economic growth in 2026, but at a significant to the government.
US inflation was last measured at 2.4% y/y in May 2025, while core inflation remains slightly more elevated at 2.8% y/y. However, the risks are obviously to the upside, given President Trump’s recent increases in US import tariffs. Unfortunately, the unknown inflationary impact of the recent increase in US import tariffs as well as the fiscal stimulus impact of the “Big Beautiful Bill” later this year and into next year has contributed to the Federal Reserve (Fed) keeping interest rates on hold in recent months. The Fed has signalled that it is in no hurry to cut interest rates further. It has adopted a “wait-and-see” approach to any further changes in monetary policy but has acknowledged that there remains a downside bias to US interest rates.
Eurozone economy remains under pressure despite showing some resilience so far this year
The Eurozone economy had a strong start to the year, with GDP growing by 0.6% quarter-on-quarter in the first quarter of 2025, following a 0.3% expansion the previous quarter. This is the fastest growth rate in over two years. Germany’s economy rebounded (+0.4%) and Ireland’s GDP surged (+9.7%) amid a strong rise in exports as producers front-loaded shipments ahead of potential US tariffs on the region.
High-frequency economic indicators suggest that there is some stabilisation in economic activity, although growth momentum remains erratic. While the region’s manufacturing PMI remained in contraction, it rose to its highest level since August 2022, signalling only a marginal downturn in manufacturing conditions. The services PMI returned to expansionary territory after a brief contraction in May as business confidence among service providers improved.
The region’s near-term outlook will depend on the outcome of trade negotiations between Europe and the US. Positively, Germany’s planned fiscal spending on infrastructure and defence could potentially offset some of the impact of tariffs for the manufacturing sector, with positive spillovers for the region starting next year. Should tariff rates be reasonable at around 10% to 15%, Eurozone GDP could grow by as much as 1% in 2025, before rising to 1.1% in 2026.
Eurozone inflation was slightly higher in June, rising to the European Central Bank’s (ECB) target of 2% year-on-year, from 1.9% in May. Importantly, services inflation also edged up to 3.3%, as the sector’s inflation abates slowly. While higher tariffs and increased fiscal spending could place upward pressure on inflation in the Eurozone, the appreciation of the euro and a gradual cooling of services inflation should offset these risks, preventing any real build-up in price pressures.
Given the well-contained inflation, the ECB lowered its benchmark interest rate for the eighth time since it started its easing cycle a year ago. The decision to cut rates by 25 bps brought the refinancing rate down to 2.15% in June, amid expectations of weaker growth and lower inflation in the region this year. Even though the ECB did not commit to a particular rate path, ECB president Christine Lagarde said that the central bank was getting to the end of its rate-cutting cycle.
Increased government support to partially offset impact of trade war on Chinese economic growth
China’s GDP grew by a solid 1.2% quarter-on-quarter in the first quarter of 2025, slower than last quarter’s expansion of 1.6%. The growth was driven by significant infrastructure spending from strong fiscal support; export front-loading to avoid tariffs; and as sales of consumer goods benefit from government subsidies.
While the upbeat trade negotiations and a truce between the US and China has eased tensions since April, uncertainty remains and is likely to weigh on Chinese activity going forward. Recent high-frequency data shows that activity has recovered from the shock of “reciprocal” tariffs and subsequent retaliatory actions between the two nations. In particular, the decline in China’s official manufacturing PMI eased in June as the ceasefire supported Chinese production.
Importantly, hard data paint a mixed picture. For one, Chinese exports moderated in May as strong demand from other regions could not fully offset the drop in shipments to the US. In addition, industrial production recorded a mild slowdown in May due to the impact of US tariffs. In contrast, retail sales surged in May, driven by government’s goods trade-in programme and early start of 618 shopping festival. Overall activity, however, remains below trend amid ongoing weak consumer confidence.
The 90-day tariff truce between China and US improved Chinese activity and is likely to continue to help the momentum in activity in the very short term as manufacturers capitalise on it by front-loading shipments. The medium-term outlook, however, remains uncertain and generally subdued, given weak confidence levels and uncertainty around the future of export activity.
It is therefore vital for Chinese authorities to continue to fast-track the roll-out of stimulus measures, not only to provide a powerful signal to markets but also to stimulate domestic demand. Additional fiscal expansion could also be introduced, with a focus on lifting domestic consumption, supporting exporters, and stabilising the capital markets.
Unfortunately, even if additional measures are introduced, they are unlikely to fully offset the external shocks and systemically weak confidence levels. This reduces the likelihood that China will meet its GDP growth target of “around 5%” in 2025. In fact, the economy is likely to grow by 4.5% in 2025, before moderating to 4.1% in 2026.
China’s economy continues to face a deflationary battle, reflecting ongoing weakness in domestic demand conditions, which remain imbedded even with government’s efforts to boost consumption activity. While headline consumer prices swung back to inflation in June, with growth coming in at 0.1% year-on-year, on a monthly basis, prices fell for a second month and deflation in producer prices intensified. While core inflation continued to improve in June, it is still well below the pre-pandemic norm of 1.5%.
In May, the People’s Bank of China (PBoC) announced multiple monetary support measures, showing that government is stepping up easing. It confirms the urgency needed to support the Chinese economy. The measures included a 50-bps cut to the RMB required reserve ratio and a 10-bps cut to the one-year loan prime rate. Further policy cuts are expected this year, including additional cuts to the RRR and cuts to the Medium-term Lending Facility rate.
The stimulus measures are expected to boost banks’ lending capacity to support economic activity. In addition, by adding more liquidity into the financial system, the government probably wants to provide enough funds to facilitate the front-loading of existing fiscal stimulus and the introduction of additional support in the second half of the year. Even so, the stimulus measures are likely to be reactive in nature and remain largely supply-centric, limiting the overall positive impact on economic growth.
South African economic growth remains disappointingly weak
In the first quarter of 2025, the South African economy grew by a very modest 0.1% quarter-on-quarter. This compares with a revised increase of 0.4% in the final quarter of 2024. Over the past year the economy expanded by 0.8%, while the GDP performance for 2024 was revised down from 0.6% to 0.5%. An important reference in evaluating the growth rate is population growth. According to the most recent population estimate released by Statistics SA, the country’s population is currently growing by around 1.4% a year, which suggests that the GDP performance has to at least exceed 1.4% in order to be encouraging. Ideally, it needs to be in excess of 3% a year on a sustained basis to start to make a difference to lifestyles and investment opportunities.
It seems clear that SA’s persistently weak level of business and consumer confidence, coupled with a breakdown of key infrastructure, a high level of import intensity, and a general lack of fixed investment spending has undermined the country’s growth performance. As we have highlighted on numerous occasions, if SA’s growth initiative can start to make greater use of public/private partnerships to support infrastructural investment and boost the deregulation of the business sector (including a renewal of municipal service delivery), we would expect growth to start to improve more meaningfully.
In May 2025, the headline inflation rate remained unchanged at 2.8%. Over the past eight months inflation has remained in a narrow range of 2.7% to 3.2%. Ordinarily this would encourage the Reserve Bank to cut interest rates further. However, the possible reduction of the inflation target to 3%, together with uncertainty associated with recent geopolitical events and the vagaries of Trump’s tariff policies, are likely to encourage the Reserve Bank to maintain a cautious approach to any further changes in monetary policy. Consequently, we expect the Reserve Bank will cut rates only once more in the second half of 2025, and by a modest 25 bps, taking the repo rate down to 7%.
Finally, it is worth highlighting that in recent months domestic inflation has benefited from a convergence of numerous positive factors that are not all likely to persist. These include a year-on-year decline in the fuel price, subdued food inflation, a reasonably strong currency, China exporting deflation, and a weak housing market, which has kept rental inflation below 3%. Consequently, we expect inflation to move back to around 4.5% over the next 12 months as some of these factors become less supportive. This is still a good outcome when measured against the 4.5% midpoint of the inflation target, but it is not necessarily all that welcome in the context of the Reserve Bank’s quest to anchor the inflation rate at around 3%.
