Considering the recent global turmoil, the International Monetary Fund (IMF) sharply lowered its forecasts for economic growth globally, citing further downside risks due to policy changes in the US and possible knock-on impacts on confidence and economic activity. It also noted that the latest forecasts are viewed as “reference” forecasts rather than “baseline” forecasts due to a lack of confidence in how the global growth picture will unfold in the medium term.
Looking more closely at the US (S&P 500 Index: -0.3%), President Trump’s 2 April announcement of additional tariffs on all countries, including a further 34% on Chinese goods, sent markets into a downward spiral and was met with swift retaliatory measures from certain states. Shortly after the initial announcements, Fed Chair Jerome Powell reiterated that an escalating trade war is widely anticipated to stoke inflation and slow down growth. Trump, shortly after the 2 April announcement, proclaimed a 90-day pause in additional tariffs on countries that are willing to negotiate with the US, although a 10% blanket levy remained in force. This helped restore confidence in global markets with recent commentary about scaling back certain tariff proposals and the possibility for a significant reduction in the 145% levy that's already in place for Chinese imports, providing further support. Towards month end, Trump also toned down his approach towards the US Federal Reserve and noted that he has “no intention” of firing Fed Chair Jerome Powell, despite remaining frustrated with the central bank not acting quickly enough to lower interest rates. This came after several social media posts, as well as certain remarks from individuals in the administration that suggested that the President was looking for a way to replace Powell.
Moving over to Europe (Euro Stoxx 600 Index: -1.0%), the European Central Bank (ECB) reduced interest rates by 25bps at its April meeting, citing growing confidence that inflation is on track to return sustainably to the 2% target. While inflation has continued to ease, risks to the Euro area outlook remain, especially due to rising global trade tensions, which is hurting confidence and has seen a tightening in financial conditions. The ECB acknowledged that growth prospects have weakened and reiterated a data-dependent approach going forward.
China (MSCI China Index: -6.4%) has yet to fully recover from the US tariff-entanglement as uncertainty prevails. Chinese Foreign Affairs Ministry spokesperson, Guo Jiakun recently reiterated that “China and the US are not engaged in any consultation or negotiation on tariffs.” In the week prior to month-end, Trump reportedly said he plans to be "very nice" to China in any trade talks and that tariffs will drop if the two countries can reach a deal. This followed on from US Treasury Secretary Scott Bessent saying, in a closed-door engagement, that the standoff between the two largest economies in the world was unsustainable.
On the local front, the JSE was able to deliver solid gains (All Share Index: +3%; USD terms: +2.2%) despite the tough and volatile global environment. The Budget impasse was closely monitored with the Ministry of Finance issuing a press release late in the month to forgo the 0.5% Value Added Tax (VAT) increase that was announced in March. The Minister of Finance, Enoch Godongwana, expects to introduce a revised plan, “Budget 3.0”, within the next few weeks that will address the R75 billion revenue shortfall following this decision.
Outlook
Local
- The US-led tariff uncertainty continues to hang over the macroeconomic outlook. While there is a possibility that a pause in reciprocal tariffs will continue to be rolled over beyond July for most countries, and resolved for some, the uncertainty has been enough to compound global growth forecast downgrades. The IMF has lowered growth expectations by 0.5ppt this year, to 2.8%, and 0.3ppt next year, to 3.0%. Inflation will be stickier than previously anticipated.
- The IMF has also lowered its South Africa (SA) growth forecasts, to 1.0% this year and 1.3% next year. Our forecast for 1.3% (2025) and 1.6% (2026) also reflects weaker external demand and a weak starting point for the productive sectors, however, we remain constructive on household spending and an ongoing structural investment drive. In line with lessened structural constraints, growth still breaches 2.0% over the medium term.
- We anticipate that inflation will remain subdued, averaging around 3.5%, as the low starting point and softer oil prices weaken the 2H25 uptrend. Inflation is anticipated to remain around the midpoint of the South African Reserve Bank (SARB’s) 3% to 6% target range over the medium term.
- Sticky inflation in the US has prompted us to shift our expectation of the Fed’s resumption of the cutting cycle to December 2025. The belief that cuts remain on the horizon is driven by the view that tariffs are largely growth negative. The view of the Fed, alongside weak local inflation, also supports further rate cuts by the SARB. While risk management will maintain the SARB’s cautious stance, we see interest rates moving closer to neutral, at 7%, within a year.
- Fiscal policy faces added slippage risks as the planned VAT increase has been reversed. This, amid a period of risk aversion, will weigh on SA’s sovereign rating outlook and cost of funding. This could also spillover to the necessary restrictiveness of monetary policy given currency and market access risks.
Global
- Proposed policy changes by President Trump (tariffs, taxes, deportations, deregulation) are increasing uncertainty in global markets and economies. Implementation (or not) of these policies will dictate the direction of markets over the next few months. Global economic uncertainty indices are making new highs.
- US growth expectations have continued to turn negative. Since the 2nd of April “Liberations Day” reciprocal tariff announcement, Bloomberg consensus for US 2025 GDP has fallen from 2.3% to 1.4%. Soft data, such as business and consumer expectations, have deteriorated over the last month. Overall economic data continued to disappoint in April. Our house view is for US growth to slightly underperform consensus in 2025.
- This month, both CPI and core CPI surprised slightly to the downside, coming out at 2.4% and 2.8% respectively. However, inflation expectations have risen: University of Michigan 1-year inflation expectations have risen to 6.7% versus 5.0% in the previous month. This is still some way off the 2% target of the Fed. Shelter inflation and core services should continue to trend lower, causing overall inflation to move down towards target, but risks remain that inflation proves “stickier” than expected (depending on the rates where tariffs eventually settle).
- The Fed’s interest rate cutting cycle that started in September 2024 has come to a roadblock as they paused again at their latest March meeting. The Committee updated the post-meeting statement to note that “uncertainty around the economic outlook has increased.” The uncertainty of potential policy changes (like tariffs and deportations) should make them more data dependent going forward.
- In emerging markets, Chinese macroeconomic data held steady in April. GDP for 1Q25 was 5.4%, beating expectations of 5.2%, and retail sales for March was also better at 5.9% (vs expectations of 4.3%). We expect that additional fiscal and monetary support from authorities on any clarity from US tariffs will minimise the impact on GDP.
- The US dollar had a very negative month as positioning was extended and poorer US economic data versus Europe caused some positions to be unwound. Capital flows for the month have been out of the US into other less expensive markets as uncertainty increased.
- Gold continued with its remarkable run to new highs this month. Reasons include central bank buying, geopolitical tensions, uncertainty around policies, and investor appetite growing.
- Given all the above uncertainties, we are closely aligned to our strategic asset allocation benchmarks, with a slight defensive twist. We slightly favour fixed income over equities.
