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31 Jan 2025

Thematic View: What to watch in 2025

Osagyefo Mazwai

Osagyefo Mazwai | Investment strategist, Investec Wealth & Investment

From Trump to AI to the GNU, it promises to be a bumpy ride in 2025. We look at some of the key themes to watch.  


A re-born “new dawn” in focus for South Africa

The rebirth of a government of national unity (GNU) provided a new pivotal point in South African history following years of sluggish growth, high unemployment and increasing inequality. The performance of South Africa’s bonds, equities and currency have been fundamentally underpinned by the hope that the GNU will enforce pro-growth policies following the poor performance of the former ruling party at the polls and the party’s decision to align with “market-friendly” coalition options to form a new government.

In 2024, we experienced a significant decline in the levels of loadshedding (over 300 loadshedding-free days at the time of writing), which had been a binding constraint on economic growth for the last few years, while there were some key changes to legislation to unlock the latent potential of, among others, the logistics and energy sectors of the economy. Business confidence has risen since the elections and will be key for economic growth and employment creation. But what is the direction of travel now, especially in the light of previous experience highlighted in the chart below?

Chart 1: SA BER Business Confidence Index
 

Chart 1: SA BER Business Confidence Index

Date sampled: 14 January 2025
Source: Investec Wealth & Investment, Bloomberg

Of significance now is the extent to which the promises made will be realised. The story now shifts to “substance over form”, which in essence suggests that the time has come for more tangible results from the various economic interventions to meaningfully shift GDP growth expectations and outcomes.

There are various tailwinds to the story, which include:

  • Lower inflation (increased spending power for consumers) – inflation expectations are now at the midpoint of the central bank target range, according to the Bureau for Economic Research.
  • Falling interest rates – lower inflation implies that the South African Reserve Bank (SARB) can cut more aggressively, particularly as inflation now sits below the SARB’s target range.
  • The two-pot withdrawals – The quantum of the first withdrawals under the two-pot retirement system suggests that the uplift may be a once-off event, but withdrawals from now on may still underpin higher household spending.
  • Lower Brent crude prices globally – the eroding effect of high petrol and transport prices on consumers has dissipated and has the effect of greater spending power for consumers.

The net effect of these factors is that we expect an uplift to household final consumption expenditure of between 2% and 4%, above average household spending growth over the last 15 years or so of around 1.5%.

Chart 2: The impact of the two-pot system, lower fuel prices and rate cuts on consumption
 

Chart 1: US Q2 GDP by segment

Source: Investec Wealth & Investment, SARB, StatsSA, Ooba, World Bank, Bloomberg (23 Jan 2025)

The lower levels of loadshedding imply that businesses will be able to operate with less disruption and spend less on diesel and other sources of energy. Thus, businesses can invest in other productive capital such as technology, fixed investment and human capital. Business confidence is the key leading indicator for economic and employment growth, as we summarise in this Business Day article.

If the government manages to maintain the momentum of the last six months and the various economic interventions implemented bear fruit, then the tailwinds to South Africa’s growth story will gain speed, and there may be scope for positive re-ratings to our equity market and outlook, and for more sizeable declines in our bond yields. The February Budget will also be key in establishing progress made and in getting a grasp on the potentially improving fiscal outlook – bearing in mind our view that the National Treasury erred on the side of caution in October 2024 during the Medium-Term Budget Policy Statement.

How aggressively can Trump pursue his policies?

The Republican Party gained a trifecta victory in the US elections, obtaining the Presidency, the House of Representatives and the Senate, and the economic policy moves by the incoming Donald Trump administration have had a significant impact on the global economy already. This has so far been expressed through various asset classes, including equities, bonds and currencies, among others, since the policy proposal will have wide-ranging consequences for the global economy. The most significant of the proposals focus on tariffs, immigration, deregulation and taxes.

It’s worth highlighting that some of Trump’s policy proposals that require US Senate approval will be subject to the filibuster tradition that requires 60 votes in favour of debate to move onto the passing of legislation.

There is a broad-based belief that the policy proposals, if implemented, would be a) inflationary and b) hurt the US economy. Deporting 11 million immigrants would significantly reduce the labour market and, crucially, impact aggregate demand due to the loss of consumers. Lower aggregate demand can damage corporate profitability, which would be exacerbated by rising wages resulting from labour supply shortages. This diminished corporate profitability and increased risk of layoffs in such an environment would further harm the US economy. Tariffs have the effect of increasing the price of goods imported. This is expected to be inflationary based on the combination of goods to be tariffed by the Trump administration. When it comes to tariffs, it’s worth understanding the inherent comparative advantages and absolute advantages in the Chinese economy. US business interests in China know that there are comparative advantages to having operations in China. It is not only about lower wage costs but also about the interconnected networks and infrastructure in China, and it’s not clear how quickly the US would be able to catch up.

Both the Democrats and Republicans have lost elections because of those factors in the past. It is therefore reasonable to assume that the Republican Party may not fully support policy positions that impair their chances of retaining the Senate and the House during midterm elections in two years as well as defending the Presidency in four years’ time. To protect the Republican Party from losing the trifecta, Trump will have to both manage inflation and maintain robust economic activity. That is one reason why Trump may be hindered from fully implementing the measures that he hopes to.

Can Trump pursue policy at the pace and rate he suggests? His moves in his first week of office suggest yes, to some extent, but the proposed 10% tariff on goods imported from China is certainly not the bite the market was expecting.

Chart 3: Average real Qoq GDP growth for quarters leading up to election (%)

Chart 3: Average real Qoq GDP growth for quarters leading up to election (%)

Date sampled: 8 November 2025
Source: Investec Wealth & Investment, Bloomberg, US goverment archives

Chart 4: Average inflation four quarters leading up to election (%)  
 

Chart 3: Average real Qoq GDP growth for quarters leading up to election (%)

Date sampled: 8 November 2025
Source: Investec Wealth & Investment, Bloomberg, US goverment archives

Will China finally make good on its promises?

One of the areas that we highlighted was key to watch last year was the expected stimulus package from Chinese authorities, which ended up disappointing. We should acknowledge that there was a broad range of policy interventions announced, with both fiscal and monetary responses announced towards the end of the year. There has been some evidence that the responses were somewhat supportive of the Chinese economy, with growth in the final quarter exceeding expectations at 5.4% versus 5% and the target growth for the year of 5%. This was broadly in line with market expectations.

The continuation of the stimulus-response measures and the magnitude of the stimulus-response measures will possibly be largely guided and influenced by how aggressively President Trump pursues China in the form of tariffs and their subsequent impact on the Chinese economy (demand for Chinese goods) and industrial production outcomes. The 10% tariffs will hurt the Chinese economy with varying estimates of the extent to which the tariffs will hit growth. It is worth noting that the impacts of a 10% tariff will be less pronounced than the initial election campaign promises of a 60% tariff or even a 25% tariff increase (which possibly remains the base case assumption).

As the Chinese economy continues to battle slowing growth in a weak consumer environment, Chinese authorities will seek to propel consumption spending and fix the ailing property market – which has also influenced the relative propensity to spend due to weakened consumer balance sheets. The latest data out of China show that the decline in house prices has largely abated.  The strength of the Chinese economy has various implications for emerging markets (such as ours) as well as global growth. Therefore, the extent to which China stimulates this year will be significant. How it continues to stimulate will also be of keen interest when looking at a consumer-led or industrial action-led stimulus package.

One bit of news out of China at the start of the year that disappointed slightly was manufacturing purchasing manager indices, though they remain in expansionary territory (above 50). Manufacturing activity will be important for volatile global commodity prices.

Total social financing will be key, and the latest data points showed a rebound in total social financing into positive territory. A more sustained period in positive territory would give the greatest indication of the direction of the Chinese economy. Consensus forecasts still have growth slowing further this year relative to the last year two years.

As mentioned, new house prices (month-on-month change) came in at their best level in 17 months in November, which suggests that the consumer environment is improving. Retail sales however surprised to the downside, another example of the conflicting data.

Chinese authorities remain aware of the low inflation problem. The Chinese prime rate was reduced over the year. Growth in China remained below the average between 2010 and 2023 and even the most optimistic forecasts don’t see growth returning to the long-term average over the next few years.

Global politics remains fluid

2024 was a year in which a large portion of the world’s population went to the polls. While 2025 is not comparable from that perspective, it is worth highlighting that the global political arena remains fluid with some major economic hubs going to the polls this year. The elections in 2024 saw seismic shifts in political power balances across the world, with the people demanding more of politicians, particularly in an environment of stagnant growth and high inflation.

Firstly, Europe remains in a period of political instability. What jumps to mind is events in France towards the tail end of 2024 where the prime minister was ousted, which raised questions about the future of President Emmanuel Macron. A new prime minister has been elected and normality seems to have returned to one of Europe’s largest economies.

One key election to be on the lookout for is in Germany at a time when, as the Financial Times puts it, Angela Merkel’s economic legacy is increasingly coming under question. The Russia/Ukraine conflict brought to the fore the fragility of the European economy given its reliance on “cheap” Russian gas. Recent sanctions on Russian oil by the US should reverberate through oil markets and should lead to material shifts in inflation and interest rate expectations for the year ahead. Brent crude has since breached the $80/barrel level, but it is worth noting that at this stage the price of Brent crude is still far off the $100/barrel, breached at the onset of the war in Ukraine. The chart below illustrates that wars in themselves don’t typically impact the price of Brent crude, however, when there are spillover effects into the oil supply markets, that is typically when the harshest impacts are felt.

Chart 5: Relationship between conflict in the Middle East and Brent crude pricing
 

Chart 5: Relationship between conflict in the Middle East and Brent crude pricing

Date sampled: 2 January 2025
Source: Investec Wealth & Investment, AJC, Global issues

Another election to be on the lookout for is the Canadian election, with Prime Minister Justin Trudeau announcing his resignation recently. Trump has adopted a negative posture on Canada, as he did during his first term. We recall that Trump cancelled the North America Free Trade Agreement (NAFTA), replacing it with the United States-Mexico-Canada agreement. Most politicians in Canada are not supportive of Trump’s stance on Canada and perhaps an incoming leader will be expected to adopt an equally hostile stance, which may provide some geopolitical turmoil in North America.

Other key general elections include Japan, Australia, Singapore and mid-term elections in Argentina.

Robotics, automation and artificial intelligence

Last year we wrote on this theme and cited some risks given the potential for rising regulation of the sector. That did not quite play out as we expected. In fact, the performance of the S&P 500 and of the Magnificent Seven proved to the contrary of those assumptions. The theme appears to remain intact, although there are questions about stretched valuations particularly in the information technology sector – highlighted by the major selloff in Nvidia immediately following the announcement of China’s large language model, DeepSeek. President Trump’s recent pronouncements regarding his demand for $500bn in spending by the sector suggests that the rally may continue, but only in so far as the evolution has supportive fundamentals within the broader economy.

Perhaps what warrants further inspection is the implication of automation and AI on the future of work. One argument that supports a limited scope to automation is that computers do not consume goods and services, consumers do. Therefore, corporates would be acutely aware that development cannot occur for development’s sake. Automation and AI, etc, which threaten job security, imply that aggregate demand for goods and services globally should fall. This threatens the very sustainability of corporates who are fundamentally built to cater to for the needs of consumers.

That said, we cannot argue against the productivity gains that can be realised through automation and AI. We also should remain acutely aware of previous waves of industrialisation that initially threatened job security but ended up resulting in new sectors, jobs and fields of study coming to the fore.

It will be interesting to watch how this theme unfolds over the next year. We provide an assessment of this trend in an article we released in Daily Maverick last year for some context.
 

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