Donald Trump was inaugurated as US President on 20 January 2025. In the 85 days since then he has signed at least 116 executive orders and has rescinded almost 80 executive orders signed by President Biden. While some of President Trump’s executive orders have focused on deregulating the business sector, many more have focused on increasing import tariffs, especially on the US’s main trading partners, namely China, Mexico, and Canada.
On 2 April, the White House announced its long-awaited comprehensive tariff policy, comprising a 10% minimum reciprocal tariff on countries outside Canada and Mexico, with significantly higher tariffs for roughly 60 countries. Understandably, this was far worse than analysts expected and it sparked significant financial market volatility, including widespread weakness in global equity markets. On 9 April, President Trump revised his tariff strategy by reducing all reciprocal tariffs to 10% and pausing the implementation of reciprocal tariffs for 90 days. Unfortunately, the key exception has been the emergence of an uncontrolled trade war between China and the US. In essence, the US has imposed a cumulative 145% tariff on all Chinese goods, while China has responded with 125% tariff on imports from the US. These measures will raise the average US import tariff rate to levels not seen since the early part of the 20th century.
Unsurprisingly, the US Trade Policy Uncertainty Index has risen sharply to a record high, while consumer confidence has plunged to a level that matches the worst point of the Covid pandemic. Many US household are extremely concerned that the higher tariffs will lead to sharply higher inflation, which would severely undermine their purchasing power.
Under these circumstances, it is understandable that many businesses around the world would adopt a “wait-and-see” approach to international trade, which risks stalling fixed investment spending and could lead to job losses as companies try to absorb some of the cost pressures generated by higher tariffs, especially between the US and China.
In 2024 global trade totalled $33 trillion, which is a record high and around 30% of world GDP. Unfortunately, a slowdown in global trade is, typically, associated with a slowdown in global growth.
The US economy lost momentum in the first four months of 2025, hurt by the surge in policy uncertainty
In the final quarter of 2024 the US economy grew by 2.4% q/q (annualised). This is below the Q3 2024 growth performance of 3.1% but still a solid outcome. In 2024 the US economy grew by a robust 2.8%, which is slightly down from 2.9% in 2023, but above the long-term average annual growth rate of 2.5% and well above the population growth rate.
Importantly, a breakdown of the Q4 2024 GDP performance by sector reveals that US economic growth was again mostly consumer-driven. For example, in the final three months of 2024 consumer spending grew by a very robust 4%. This added 2.7 percentage points to the quarterly growth performance, which means that, without an increase in consumer spending, the US economy would probably have declined. Over the past three years, consumer spending has contributed around 70% of total economic growth.
Imposing substantial import tariffs that increase the financial burden on the household sector is likely to undermine the component of the economy that has been largely responsible for its outperformance in recent years. While it can be argued that consumers may frontload some spending in 2025 to avoid the impact of the higher tariff, the increased cost of imports will eventually dent the household sector’s purchasing power.
At this stage of the business cycle the US labour market remains strong. In March 2025, the unemployment rate rose slightly from 4.1% to 4.2%, which is still low by historical standards. The labour market added an impressive 228 000 jobs in March 2025. Over the past six months the US has added an average of 181 000 jobs a month, while over the past 12 months the average monthly increase in employment has been 157 000. These are robust gains under most circumstances – although job gains are expected to slow considerably over the coming months as the negative impact of high import tariffs starts to take effect.
It is worthwhile highlighting that US government employment rose by 19 000 jobs in March, driven mostly by a 17 000 increase in local government employment. In terms of the Federal government (which is what the Department of Government Efficiency or DOGE has been focused on), employment fell by a modest 4 000 jobs, with 600 of these job losses occurring in the postal services. This suggests that DOGE has so far had a very modest impact on Federal government employment. The reduction in Federal government employment was more than offset by the ongoing increase in local and state government employment.
While US consumer inflation moderated to 2.4% in March 2025, worries about tariffs are forcing inflation expectations up. The University of Michigan’s one-year-ahead household inflation expectations figure surged to a 43-year high of 6.7% in April.
Unsurprisingly, the US Federal Reserve (Fed) kept interest rates unchanged at its policy meeting on 19 March 2025. The Fed started its interest rate cutting cycle in September 2024 and has cut rates on three separate occasions, by a total of 100 bps, taking the Federal Funds Target Interest Rate to a range of 4.25% to 4.5%. The minutes of the March Federal Open Market Committee meeting highlight that the committee “generally saw increased downside risks to employment and economic growth and upside risks to inflation while indicating that high uncertainty surrounded their economic outlooks”. Meeting participants also “judged that inflation was likely to be boosted this year by the effects of higher tariffs”, and most members favoured a “cautious approach” to monetary policy amid “uncertainty about the net effect of an array of government policies on the economic outlook”. Effectively, the Fed is adopting a wait-and-see approach to setting interest rates.
Higher tariffs are likely to further delay the Eurozone’s economic recovery in 2025
Eurozone economic activity rebounded in 2024, with the economy growing more than expected at the end of the year. Growth was recorded at 0.2% quarter-on-quarter in the fourth quarter of 2024, led by robust household consumption (0.4%) and investments (0.6%). Despite the better-than-expected outcome, this represents a slowdown in momentum relative to the previous quarter, when the economy grew by 0.4%.
In 2024, Eurozone GDP expanded by 0.9%, an acceleration from 2023’s growth of 0.4%, as slower inflation, rising incomes and a resilient labour market boosted household consumption activity.
Recent high-frequency economic indicators suggest that the Eurozone’s economy remains solid, with activity picking up pace towards the end of the first quarter of 2025. Not only did the region’s manufacturing PMI increase by 1.1 index points in March, but the manufacturing production component also returned to expansionary territory for the first time in two years. Some of this improvement was driven by transitory factors as companies increased shipments to the US ahead of the tariff escalation. However, the uptick was largely thanks to recent pledges to increase fiscal spending on defence and infrastructure. In addition, the labour market in the Eurozone remained robust, with the unemployment rate falling to a record low of 6.1% in February.
Unfortunately, the outlook for the Eurozone economy is extremely uncertain amid persistent risks, preventing a sustained economic recovery. The single biggest risk is the decision by President Trump to impose 20% tariffs on most EU imports and 25% on steel, aluminium and car imports. The 20% tariff has since been reduced to 10% amid a 90-day pause on all “reciprocal” tariffs above the baseline. The tariffs on steel, aluminium and cars remain in place.
While it is currently difficult to assess the impact of tariffs, it is clear that they will lead to weaker exports and investments in the Eurozone, hurt by slower growth in global trade and weaker business confidence given the unprecedented degree of policy uncertainty. Hopefully domestic recoveries, led by Germany’s historical fiscal stimulus package, can offset some of the trade weakness. If the US and EU can strike a deal and no additional tariffs are imposed, Eurozone GDP growth should moderate only marginally to 0.7% in 2025, before posting a mild recovery in 2026 to around 1%.
After drifting higher in recent months, Eurozone inflation has since moderated, inching closer to the European Central Bank’s (ECB) target of 2%. The annual rate of inflation fell for the second consecutive month in March to 2.2% from 2.4% in February. Importantly, services inflation, a concern for the ECB, also moderated to 3.4%, the lowest level in almost three years. Unfortunately, inflation could rise in 2025 because of the trade war with the US (especially if the EU retaliates), as well as the planned increased spending on defence and infrastructure.
In its latest meeting, the ECB continued its rate cutting trend, lowering its benchmark interest rate for the sixth time since June 2024. The decision to reduce interest rates by 25 bps in March brought the refinancing rate down to 2.65%. Despite the elevated risk to inflation, the impact of a looming trade war on Eurozone GDP growth would far exceed any potential inflationary threats, necessitating further interest rate cuts by the ECB.
China is very likely to miss its 5% GDP growth target this year, given the trade war with the US
China’s GDP grew by a robust 1.6% quarter-on-quarter in the fourth quarter of 2024. This is higher than the previous quarter’s expansion of 1.3% and the fastest growth in six quarters, helped by strong exports, along with a slew of stimulus measures introduced towards the end of last year. In 2024, Chinese GDP grew by 5%, as the more robust performance of the industrial sector outweighed weaknesses in other parts of the economy. While the government achieved its 5% growth target, it was lower than the 5.2% growth recorded in 2023, but an improvement from the 3% recorded in 2022.
Unfortunately, China’s solid growth performance is unlikely to continue in 2025 amid rapidly escalating trade tensions between the US and China. Positively, however, recent high-frequency data shows that the Chinese economy has been resilient, despite the initial 20% tariffs imposed by the US at the beginning of the year. China’s exports recorded a strong rebound in March amid some front-loading by US importers ahead of additional tariffs. In addition, the manufacturing PMI remained in expansionary territory for the second consecutive month in March. Apart from the usual seasonal boost, the PMI was supported by policy initiatives and the front-loading of exports.
China’s industrial production was higher than expected at the beginning of the year, with investment spending rebounding, driven by strong infrastructure investment. On the other hand, despite a noticeable improvement in retail sales at the start of the year (partly boosted by the goods “trade-in” initiative), activity levels remain below trend, hurt by persistent weak consumer sentiment.
While the initial reaction by China to the tariffs was measured and targeted, probably to avoid an escalation, the US announcement of the 34% “reciprocal” tariffs in April has evoked a tit-for-tat response by China. The escalation of the trade war between the two countries now brings total US tariffs on most Chinese goods to 145% since Trump took office, with a list of electronic goods being exempt from the additional tariffs. Meanwhile, China has imposed import tariffs of 125% on US goods.
Unfortunately, downward pressures on economic growth are mounting, given the rapidly deteriorating trade relationship between China and the US. Given this, Chinese authorities are likely to fast track the implementation of stimulus measures announced at their 2025 Government Work Report (GWR). Additional fiscal expansion may also be introduced in the second half of the year, with a focus on lifting domestic consumption, supporting exporters, and stabilising the capital markets.
These measures, however, are unlikely to fully offset the external shocks, reducing the likelihood that China will meet its recently announced GDP growth target of “around 5%” in 2025. Instead, the surge in tariffs between China and the US could reduce Chinese GDP growth by as much as two percentage points.
Should the trade tariffs exacerbate China’s overcapacity problem, the country could face a protracted deflationary battle. Already China’s headline consumer inflation has been in deflation for two consecutive months, coming in at -0.1% year-on-year in March, following a decline of 0.7% in February. China’s headline inflation has been below the People’s Bank of China’s (PBoC) new implicit target of 2% for more than two years. While core inflation rebounded in March, it is still well below the pre-pandemic norm of 1.5%. All this reflects persistently weak domestic demand conditions that remain embedded, even with government’s efforts to boost consumption activity.
Despite subdued inflation, the PBoC has been reluctant to fully implement looser monetary policy, even after signalling that it would do so. Instead, it is simply facilitating fiscal policy, amid currency and bank profitability concerns. As a result, the PBoC has not lowered policy rates since October 2024. Policy rate cuts are now expected to be fast-tracked in 2025 to help stabilise the economy.
On the fiscal side, the 2025 GWR reiterated that China will continue to implement a proactive fiscal policy to support the economy. In total, Chinese authorities have committed to a Rmb2.4 trillion fiscal expansion package this year. Policymakers are also shifting their focus towards spurring domestic demand, recognising the need to focus on the core issue of income uncertainty that is curbing consumer spending, rather than solely on building up new sectors of consumption.
South African economy is still struggling to gain momentum as the politicians fight over a 0.5% increase in VAT
In the final quarter of 2024, the South African economy grew by a modest 0.6% quarter-on-quarter. This compares with a revised decline of -0.1% in Q3 2024, growth of 0.3% in Q2 2024 and growth of only 0.1% in the first three months of the year. Critically, the 2024 annual rate of growth, which amounted to 0.6%, is well below the population growth of around 1.3%. Consequently, South Africa’s GDP per capita continues to decline, exacerbating income inequality and social tension.
A breakdown of SA’s GDP performance by sector for the final quarter of 2024 reveals that only three sectors made a positive contribution. These were agriculture, the finance sector, and retail trade. The finance and retail sectors were boosted by the two-pot retirement funds withdrawal scheme that started in September 2024.
Unfortunately, the mining, construction and manufacturing sectors continued to languish. This is a dismal growth performance considering the urgency to create employment. The South African construction sector has declined in each of the past eight years, contracting by a total of 33.7% in that period.
The positive sentiment that emerged after the Government of National Unity (GNU) was formed in early June 2024 has started to dissipate. This is partly because the members of the GNU have not been able to agree on the National Budget proposed in March 2025, specifically the proposed 0.5 percentage point increase in the VAT rate each year for the next two years. While there is a risk that the GNU will break apart, the base-case expectation is that the political parties will find an appropriate compromise that allows the GNU to continue to function.
At this stage a sustained improvement in SA’s economic growth performance is going to require that the authorities make much more progress on their initiative to involve the private sector in operating SA’s rail system, make visible progress in improving municipal service delivery (which is now the focus of Operation Vulindlela Phase 2), a concerted effort to deregulate the South African business sector and the creative encouragement of small/medium business.
In February 2025, SA’s annual rate of inflation remained unchanged at 3.2%. While the latest inflation rate is up from a low of 2.8% in October, it remains well below the midpoint of the South African Reserve Bank’s (SARB) 3% to 6% inflation target. In 2024, inflation averaged a respectable 4.4%, which is the lowest annual average since 2020. It is expected to average 3.9% in 2025.
At its monetary policy meeting in March 2025, the SARB decided to keep the repo rate unchanged at 7.5%. This is despite a downward revision to the bank’s 2025 economic growth forecast and a downward revision to its 2025 inflation forecast. The decision was not unanimous, with four committee members arguing for rates to remain unchanged and two members suggesting that interest rates should be cut by 25 bps. Since September 2024, the SARB has cut interest rates by a total of only 75 bps.
The SARB’s conservative approach to monetary policy appears to reflect the combination of three key factors. Firstly, it is concerned that a more aggressive cut in domestic interest rates would make SA more vulnerable to increased global risk aversion, given heightened global trade policy and geopolitical uncertainty, resulting in pronounced currency weakness and higher imported inflation. Secondly, that SA’s low growth environment is not due to the elevated level of interest rates, so cutting rates more aggressively would do very little to stimulate economic growth. Thirdly, the SARB would like to see inflation anchored around the bottom end of the inflation target (3%). While a 4.5% inflation outcome is an improvement from prior years, it is not in line with global inflation targets.
