Thematic View – Reflections on 2025

The beginning of 2025 was like something out of a blockbuster movie, marked by the inauguration of President Donald Trump. His return as president came with renewed uncertainty because of the myriad economic policies he aimed to implement, which were expected to disrupt the global economic order. He has certainly kept those in financial markets on the “edge of their seats” this year.

The US has been leading the charge in an increasingly protectionist global trade order. Protectionism has been a key global theme since the reopening of the world economy after the  Covid-19 pandemic lockdowns. The supply chain disruptions and inflation bubble at the time supported the idea that countries would need to become more self-reliant. Once again, however, as highlighted in the works of Adam Smith and David Ricardo, some policies, as genuine as they may be in their intent (i.e., insulating economies from inflationary shocks), are difficult to implement because of countries’ different factor endowments (such as land, labour and capital).

Geopolitical fragmentation has persisted with conflicts in Ukraine, Sudan and Gaza, territorial disputes in the South China Sea, and tensions in Iran, over Taiwan and, of late, between the US and Venezuela.

South Africa’s economic performance was also in focus, and essential questions arose regarding the pace and momentum of state-owned enterprises and structural reform. Despite business confidence falling during 2025, the broader narrative around structural reform has been encouraging. Economic growth appears to be moving in the right direction with four successive quarters of growth. The interest rate cutting cycle was shallower than expected (even with inflation well below 4.5% for the better part of the year). Still, the contained inflation should support further interest rate cuts in 2026. Withdrawals following the introduction of the two-pot retirement system seemed to mostly be allocated to car purchases, alcohol and gambling (close to a R75 billion industry now). Should inflation remain contained and interest rate cuts materialise, this should provide a meaningful tailwind for household spending, while structural reforms should support fixed investment.

The Chinese recovery story also held up relatively well, although it has come under recent pressure. This recovery story has been broadly supportive of global commodity prices and good for commodity exporters such as South Africa.

1. The tariffs that weren’t

At the beginning of the year, several assumptions were made about the impact of tariff policy on global inflation and GDP growth. The effect of tariffs on both growth and inflation has been relatively muted. Broad-based increases in US import tariffs were implemented by the US government this year on most countries worldwide. The tariffs were no surprise as they were a fundamental aspect of Trump’s election campaign. The year began with the IMF’s global growth forecast at around 3.3%, amid high uncertainty regarding the timing and overall impact of tariffs. The forecast fell to 2.8% ahead of “Liberation Day” (the day in early April when Trump implemented a swathe of new tariffs) but ultimately settled at 3.0% for the year, according to the latest October forecast.

Tariff policy has nevertheless created increased uncertainty, which is one of the key reasons why there have been downward revisions to growth and upward revisions to inflation forecasts. Trade policy uncertainty breached the levels last seen during the first Trump presidency. This reverberated through global markets.

Global growth forecasts for 2025 were volatile throughout the year, with substantial downward revisions since Liberation Day.  The US, in particular, went through harsh downward revisions. However, there has been a steady set of upgrades since Liberation Day. The forecasts for Europe, Japan, and the US remain lower than they were at the beginning of the year, but higher growth is expected in China than at the start of the year.

The gains in inflation reversed course in the US, but tariffs have been less inflationary than the market may have been expecting at the beginning of the year.

The lagged effects of tariffs on inflation remain to be seen. The US inflation path looks to be on the rise. A combination of a rise in both services prices paid component of the Institute of Supply Management (ISM) index and prices paid for durable imported goods remains a concerning sign for where inflation is likely to settle.  This is particularly tricky for the US Federal Reserve, which will have to balance inflation and employment outcomes.
 

ISM services prices paid typically lead inflation

Economic growth in the US has held up reasonably well this year, tracking at around 2%, despite the negative growth experienced in the second quarter on the back of tariffs on net exports. Household spending, while declining, has also held up reasonably well.

The key risk now is the labour market.

The effect of tariffs is typically seen in the form of margin compression. To maintain margins, corporates usually have two choices: increase prices (which could have an erosive effect on volumes), or manage costs, typically through budget reductions, including labour. A combination of inventories and high profit margins has so far cushioned the impact of tariffs on the labour market.

The labour market will be key over the coming months in assessing the state of the US economy, and how consumer spending will likely be impacted by a weakening/weakened labour market. There is currently little evidence of layoffs, but hiring conditions have deteriorated.

The US government shutdown meant that there was limited economic data to draw conclusions about inflation outcomes. Import prices have risen, though, which will likely either lead to higher inflation or impact company profitability. The impact on company profitability is a key concern, as it affects hiring and investment activities broadly.
 

2. South Africa’s rise from the ashes

South Africa experienced a noticeable resurgence in 2025. Perhaps the most significant sign of the recovery was South Africa’s first credit rating upgrade since the Global Financial Crisis. Fiscal metrics have improved and government finances appear to have stabilised. Loadshedding has been virtually absent (except for a few days earlier this year), and Transnet has shown improvement from both a rail and port perspective.

We see this in the Investec state-owned enterprise (SOE) performance index, which tracks the performance of energy, port and rail. The index is currently running at its highest levels since mid-2021. This provides a bullish case for the economy. Ports and energy are running at the best levels since 2021, while rail is well off the trough levels of 2023.

Business confidence ramped up at the end of the year, despite the earlier weakness caused by the Liberation Day tariffs and a shallower interest rate cutting cycle than had been previously expected (i.e. a less-than-expected positive monetary impulse).

We remain optimistic about the outlook for business confidence, given the improved performance we have seen from SOEs. SOEs and business confidence levels have moved together for the last four years or so. Recent peaks in SOE performance should further support business confidence. Business confidence is a key leading indicator of economic growth, private sector job creation, and fixed investment.

Although the South African Chamber of Commerce and Industry (SACCI) and the Bureau for Economic Research (BER) business confidence indices differ, they both tend to move in the same direction. The recent rallies in the SACCI index provide an additional reason to be confident about the BER index. SACCI uses high-frequency data to assess business conditions.

Finally, the South African Reserve Bank (SARB) has a new inflation target, as announced by the Minister of Finance during the Medium-Term Budget Policy Statement. The SARB had already expressed a preference for inflation to be at 3% throughout the year and announced an anchor point of 3%, the then-bottom point of the target range. The result has been a decline in inflation expectations throughout the year, which are currently at their lowest since the beginning of 2021. While the new target implies higher interest rates for longer, the key result is a better-managed price level, which is of particular importance for lower-income households.

One outcome of this improving macroeconomic picture and growth outlook, and a lower inflation target, has been a sizeable rally in South Africa’s fixed income market. The long bond yield has declined from above 12% around the time of the national elections in 2024, to around 8.5%. The combination of the lower long bond yield and the improving macroeconomic picture is likely not yet fully captured in SA Inc (listed companies exposed to the domestic economy). The JSE rally this year has been concentrated around precious metals, but there is a fundamental basis to be bullish about SA Inc.

3. The resurgence of Europe?

The European Central Bank (ECB) began its interest rate-cutting cycle in July 2024 and was expected to provide a meaningful underpin for improving growth conditions in the Eurozone. The cutting cycle was driven by two conditions: a supportive inflation outlook (towards a rate of 2%) and low growth. On a relative basis, the ECB has cut by more than the US Fed (two percentage points versus the Fed’s one and a half percentage points).

Inflation fell to below 2% in the months that followed. With inflation declining rapidly and rates coming down, the real interest rate in Europe is neutral. While the ECB is not expected to cut interest rates over the next year, the real rate has remained above the long-term level since 2010. How inflation dynamics unfold over the coming months, and whether growth improves, will likely influence whether the ECB can afford to implement a negative real rate.

Improving growth fundamentals supported economic activity in the Eurozone (as reflected in purchasing manager indices), which coincided with a strong rally in European industrials (a proxy for cyclicals). A combination of improving growth fundamentals and a weaker dollar has supported European equities. Typically, a weaker dollar is good for global equities. 

Retail sales have been robust in the Eurozone this year, on a year-on-year basis. Retail sales have consistently surprised to the upside in 2025. Consensus forecasts have been conservative. Retail sales give a good gauge of the state of the European consumer. This is likely a result of a combination of lower interest rates and lower inflation, which should help free up disposable income for higher consumption spending. Tariffs and energy market dynamics will be key in determining the direction of consumer spending and rates.

Beyond growth, rates and inflation, the Eurozone has some fiscal power to provide stimulus to the economy. This is one of the key drivers of improving expectations around economic activity in the region. Germany is expected to be the leading force for increased government spending, primarily defence spending. Geopolitical fragmentation and a US reluctance to continue funding NATO are likely reasons supporting fiscal stimulus in Europe. The US has less fiscal space to provide stimulus and help the economy, given elevated interest spending – this is sitting at around 3% versus the Eurozone at 1.9%.

The European story over the coming year is likely to be driven by tariffs and their effects on inflation, as well as fiscal stimulus, which will serve as a key mechanism for improving growth fundamentals alongside neutral interest rates.
 

4. China's stimulus comes through, then falters

China has been a tale of an economy under pressure for the last couple of years. Growth has remained high, but it has slowed nonetheless. Stresses in the Chinese property market have been mainly at the centre. These stresses and their impacts on household balance sheets have led to more conservative spending by consumers and persistent deflation in China. To remedy the situation, Chinese authorities have sought a combination of both fiscal and monetary stimulus. One indicator of stimulus in China has been total social financing, which signals broader credit conditions. The ramp-up in total social financing in the first half of 2025 suggests that growth in China should hold up well, and this is one of the reasons why consensus forecasts for annual GDP growth have risen from 4.5% at the beginning of the year to around 5% at the time of writing. The recent downward trend in total social financing does signal some stress ahead for the Chinese and global economies, particularly for commodity-exporting nations.

The rally in commodity prices is likely driven by China, with the ramp-up in total social financing, as China is a key consumer of global commodities. The year has been a good one for commodities and commodity-exporting nations, as reflected in South Africa’s trade balance. Precious metals are up nearly 65%, and commodities are up almost 20% over the last year.

China has largely avoided the full impact of US tariffs on its exports. Exports have been relatively stable over the last few months. Interestingly, Taiwan’s exports have surged, suggesting possible rerouting of products to the US through Taiwan. 

The response of many nations to US tariffs has been to reroute their trade through other nations, a phenomenon we observed the last time Trump increased tariffs, when Mexico’s imports surged.