As we head into the second quarter of 2025, two of the eight key themes I highlighted at the start of the year are taking centre stage—US President Donald Trump’s tariff-driven economic policies (now a war) and the deteriorating diplomatic relationship between South Africa and the US. In this edition of Citation, I explore how these developments are shaping both the global economy and South Africa’s economic prospects.
Trump’s tariffs: A global shockwave
Trump’s tariffs had a significant impact on the markets and global geopolitics in the first quarter of 2025. In past issues of Citation, I have talked about the narrowing growth gap between the US economy and its developed market peers. The US has done exceptionally well over the last few years, slowing down in a very orderly fashion, from about 3% annual gross domestic product (GDP) growth to around capacity growth of 2%. Concurrently, we have seen the United Kingdom (UK), European Union (EU), and Japan emerge from their growth slumps of almost zero per cent growth.
When Trump came into office, there were three main agendas to his mandate: tariffs, immigration and US fiscal spending. Most of these policies are potentially growth-negative, meaning they will negatively impact US growth prospects and increase inflation. However, as Trump starts to implement his policies, especially his blanket implementation of tariffs on key trading partners, we are seeing any existing global economy tailwinds swiftly turning into headwinds.
High-frequency data, like the Purchasing Managers’ Index (PMI) is showing that economies are already responding to Trump’s tariffs. When the PMI dips below 50, it indicates that an economy is contracting, whereas when it is above 50, an economy is expanding. For example, Europe and the UK have both been well below 50 but were recently starting to reach the 50-level mark – however, since Trump’s tariff announcement, this number is hanging in the balance. In contrast, over the course of 2024, the US PMI has been running close to 55. Now, it is starting to move down to 52 and will likely hit 50 fairly soon. The fact that Trump’s tariffs are already impacting the numbers suggests that a significant global slowdown is not far off and will likely hit the US harder than other economies.
Announced on what Trump called Liberation Day in the White House Rose Garden, the markets were spooked by the US’s implementation of blanket global tariffs. This is because they will not simply result in the normal slowdown of the economy but increase the likelihood of a US and global recession. At the beginning of the year, indicators suggested that the risk of a global recession was in the low 20%s. Those indicators have now increased the risk to approaching 60% and as we all know, if the US goes into a slowdown, the rest of the world will quickly follow.
To weather the storms, global economies will have to act sooner rather than later, and “box clever” to ensure they keep their head above water. Countries like Germany have already seen the writing on the wall. As such, in the first quarter Frederick Merz, leader of Germany’s Christian Democratic Union and likely next Chancellor of Germany, announced a plan to invest heavily into the country’s fiscal spending, to the value of €500 billion to boost Germany’s ailing economy and weather the storms being caused by Trump’s tariffs. This is the biggest fiscal spend in Europe, a move we expect will provide a significant growth opportunity for Germany and the EU going forward.
What is Trump trying to achieve?
Given the severity of Trump’s tariffs, many are asking what he is trying to achieve. Trump believes that US trade with the world is inequitable. The US economy, being 90% service-based, imports most of the goods it needs from trading partners that can supply what they want at the best possible price. With only 10% of the US economy being produced by home-grown manufacturing, the US still needs to import consumer goods, manufactured products, as well as food and raw commodities, including clothing, electronics, motor vehicles, and pharmaceuticals. This has created a massive trade deficit for the US. Trump wants this turned into a trade surplus, or at the very least, to reach a neutral position. US manufacturing and exports therefore need to offset the country’s imports.
Trump’s trade deficit concerns are not a new issue. With the US being a mature economy, it has been decades in the making. The US’s biggest trade deficit is with China, which is why Trump’s focus has always been on China in terms of tariffs. After his announcement on 2 April, tariffs for Chinese goods were hiked to 64%, then 104%, and again to 125%, before being raised, yet again, to 145%, as China and Trump continue to play tit-for-tat in a trade war. In return China has retaliated with similar tariffs. Trump has also targeted other significant trading partners like the UK, the EU and Canada, as well as emerging market (EM) economies that may have smaller trade balances with the US.
EMs may, however, find themselves at a slight advantage as they have organically started to diversify themselves out of significant risk. In the mid-80s, the emerging markets saw about 30% of their trade go to fellow emerging market peers and 70% of their trade go to developed markets. Over the last 40 years, however, that has started to change and now 50% of their trade is with emerging market peers and only 50% with developed markets. This means that emerging markets are more open to trade with each other and will be able to negotiate alternative trading agreements beyond the US. So, while there is an initial shock, as the world adjusts, EM economies will have alternative trading options.
Because the markets reacted, or overreacted, to Trump’s tariff announcement, there is a real risk that if he doesn’t soften his tone, the US will enter a recessionary environment. The last time we saw tariffs like this was in 1937 after the Great Depression. This is a drastic step in trying to protect the US economy. However today, the US is an economy that is structurally very different so what worked in 1937, may not work again. While we believe the risk of a US recession is still below 50%, it could climb if Trump continues on his current path.
On the flip side
On the flip side of the conversation, increased tariffs will mean more fiscal revenue for the Trump administration. Some of the numbers quoted are that tariffs can potentially contribute around $3 trillion to federal revenue over the next 10 years. This will give Trump the ability to cut corporate taxes from 25% to 15% as promised, a move that will stimulate US corporate earnings, which will be passed onto markets.
This argument, however, is not being welcomed by the US consumer who will feel the pain of tariffs the most by paying more for any imported product. While companies could potentially not pass tariff costs onto consumers, this is unlikely as it will hurt company earnings and be negative for markets in general.
Implications for the US consumer
Given the impact of Trump’s policies on global markets and inflation, especially in the US, we will be keeping a close eye on the health of the US consumer and how Trump’s policies will impact them. Increased tariffs will result in increased pricing, which will drive up inflation and dull demand, thereby lowering trade which in turn will further fuel the slowdown; hurting the US consumer the most.
Trump faces further headwinds as the US Department of Government Efficiency (DOGE), headed by Elon Musk, is responsible for hundreds of thousands of people being laid off, many of them Trump supporters. This may contribute to his popularity dwindling ahead of the next elections. This coupled with the market reaction, pressure from business, and Trump realising that he might run out of political capital contributed to his announcement to pause most tariff increases for 90 days.
When looking at US consumer expectations, we see that they are expecting significantly higher unemployment over the next year. According to the University of Michigan Consumer Survey, the long-term average of this indicator has been 20, and it has now shot up to 60. This is similar to levels we last saw during the 2008 financial crisis and the 2002 recession. Job losses are indicative of a slowdown, which is why markets are pricing in a higher likelihood of recession.
The latest CEO Confidence Index, a measure of overall CEO confidence, has fallen very sharply, again from a very high level. Weekly bankruptcy filings are also approaching levels last seen during the COVID-19 pandemic and the 2008 financial crisis. These indicators all show that pressure is building, and the brunt of any fallout will be felt by businesses and consumers, who make up the US voter base.
Europe’s and Germany’s tariff troubles
The EU, and Germany in particular, is also going to feel Trump’s policies. Germany, the world’s third largest economy, has an export-driven manufacturing model, making exports a major contributor to its GDP growth. As such, tariffs are now going to add to their headwinds of lower industrial output and job losses.
In an attempt to stimulate growth and mitigate against Trump’s policies, German politicians have announced a fiscal scheme to help the German economy weather this storm, which is a positive step forward for the country and the EU.
Despite Trump wanting to protect the US economy, the initial inflationary impact of tariffs will be felt more by the US than other countries. For the rest of the world, the impact may in fact, be neutral or we may even see disinflation because of a lower demand for goods and services. And as the fear of a recession grows, the price of oil has already fallen sharply, which will also have a disinflationary effect on goods and services. The European Central Bank has noted that it is anticipating further rate cuts given this environment.
The US Federal Reserve, however, is in a more difficult position. It has already paused rate cuts, despite Trump wanting it to cut rates further. If inflation does rear its head again over the next 12 months, the Fed will probably try and keep rates steady or even start hiking them again, further contributing to a slowing economic environment.
Trade isn’t dead – it’s evolving
Despite what sounds like a message of doom and gloom for the global economy, what must be remembered is that tariffs and trade wars do not mean the end of global trade. While these policies have sent shockwaves through global markets, and we are in for a tough 12 months, markets will, in a relatively short time, find their equilibrium and start to normalise. Countries will adjust, companies will adjust and the global economy will get back to capacity growth over the next few years.
If Trump realises this and eases up on his rhetoric, the severity of a slowdown will be minimised. Should he soften his stance on tariffs, the markets will respond more positively almost immediately, as we saw on the 10 April when Trump put the implementation of tariffs to all countries, except China, on hold for 90 days.
While tariffs suggest that Trump is trying to create an environment for increased US manufacturing output, it is going to take time. This will be one of his biggest challenges. Can he turn the tide before the US economy enters a recession? The risk is that he drives the US economy and global economy into slowdown, but he doesn’t achieve his desired outcome before the mid-term election.
It is also unlikely that the US will be able to compete on price with other manufacturing economies, as US labour is more expensive. Ultimately, the threat of Trump losing power may lead to him softening tariffs, which will reduce the impact of the current storm.
In summary
At the beginning of the year we expected a slowdown in economic growth. We anticipated that the US economy would come off very high levels, with a pickup of the other major economies. After the last quarter, however, we have cut our global growth forecast for the next 12 months by over 0.8% for the next year, taking it from 2.5% to 1.7%. This, however, is something we will continue monitoring.
We haven’t made any changes to our three-year views, because, as mentioned, this type of shock has an initial impact and then the world finds a new equilibrium and reverts to longer-term capacity growth, which is about 2.5%. We expect headwinds for 12 months before the world economy finds its new normal.
The slowdown is coming from the US, because that is where the impact will be felt most. We have therefore cut growth quite significantly for that economy from 2% to 0.8% for the next 12 months. China’s economy is also expected to slow, and we are expecting growth to fall from its current level of 4.5% to 3.5%, which is significant. This is especially important for South Africa, as China is its largest trading partner.
South Africa’s position in a shifting world
Turning to the local market, while the last quarter saw South Africa facing external pressure from global markets, it also had to deal with its own headwinds in the form of major political uncertainty. This was because of the fallout from the 2025 Budget that was cancelled, tabled again, and then gridlocked resulting in the discussions around the future of the Government of National Unity (GNU).
SA-US relations sour
The first quarter of 2025 also saw the massive deterioration of South Africa’s diplomatic relationship with the US. Several issues exacerbated the situation, which included the proposed renaming of the Johannesburg street on which the US Consulate is located after a controversial Palestinian activist, South Africa’s anti-Israel stance, South Africa’s discussions with Iran, and local politicians taking calls from Hamas. The biggest blow was dealt when South Africa’s ambassador to the US, Ebrahim Rasool, was expelled for making anti-Trump comments. So, while this situation will likely result in US trade restrictions against South Africa, the country may also face sanctions against some of its higher-level politicians. As this situation deepens, there have been calls for South Africa to send a delegation over to the US to try and repair US-South African relations.
Relations have been further strained by Trump’s 30% tariff hike on top of the 10% already in place. While the US is not our largest trading partner, it is an important one, with 8% of our exports destined for its shores. However, it is important to keep things in perspective. Of that 8%, a third is excluded from tariffs because those products are needed by the US and include resources like platinum. Of the remaining two thirds, citrus exporters are likely to be hardest hit, as South Africa is a big exporter of citrus to the US, with around 5% of all local citrus going to America.
In terms of its deteriorating relationship with the US, South Africa will also have to deal with the African Growth and Opportunity Act (AGOA) agreement, which comes to an end in September, and is unlikely to be renewed. While it is likely that the US will make any tariff decisions on a product-by-product basis – goods like raw commodities and agricultural products may be zero-rated or taxed at a lower tariff rate as we are a net exporter of these goods to the US – South African exporters will have to take a wait and see approach.
Having discussed the direct impact of tariffs on South Africa, I must also mention the indirect impact of Trump’s tariffs. China has been hit with 145% tariffs on all goods shipped to the US. As China is South Africa’s largest trading partner, this is going to impact South Africa’s exports to China as its economy slows, which is inevitable as the US is China’s biggest single-country trading partner. China exports nearly as much to the US as it does to the Association of Southeast Asian Nations, made up of 11 countries, and more than it does to the EU. If China’s economy slows, demand for South Africa’s resources and agricultural products will fall.
SA’s internal struggles
The above-mentioned issues: tariffs, trade wars and weakening relationship with the US, are all headwinds facing South Africa. However, we still need to address the structural challenges on the ground. This is the reason for the budget stalemate that has put the GNU under threat.
The economic reality is that the South African government needs to cover the fiscal funding gap to pay for things like the increase in the wage bill of 5.5%, and for social grants, which are being upwardly adjusted for inflation. That is why Finance Minister, Enoch Godongwana was set to announce a 2% VAT increase in his original budget speech. As many of the GNU partners did not support the move, the budget was cancelled. This was a very positive sign that South Africa’s new democracy is working. The second iteration of the budget also did not get full agreement, despite the VAT increase being lowered to 0.5% and finally being scrapped in full before the expected implementation.
When it comes to generating revenue for the country, the key challenge for South Africa is growth. Despite the heavy tax burden being levied on consumers, the economy is not growing. Low growth is further being exacerbated by high interest rates. So, while the consumer is struggling, South Africa needs additional revenue. If we do not keep up with social grants, for example, it could result in social tensions and eventually lead to unrest, which as the 2021 KwaZulu-Natal unrest highlighted, the country cannot afford.
To mitigate this shortfall in revenue, South Africa needs solid, sustained economic growth. The country therefore has to continue with the reforms that are currently in the pipeline, which is why it is so important for the GNU to remain intact.
Meaningful, sustainable growth ahead
When the GNU initially formed, markets responded well as it is a pro-business coalition. However, the recent budget gridlock spooked the markets as there is a risk of the breakdown of the GNU. This tells us that if the country wants investment, it needs to continue implementing business-friendly reforms. If it does, economic growth will follow, leading to more sustainable growth.
Sustainable growth will go a long way to remedying the budget stalemate. For example, the budget assumed growth to be 1.7%. However, South Africa’s growth assumptions have now been adjusted down to 0.75% for the next 12 months given the current global issues the country is facing. That immediately puts a lot of pressure on any of the numbers presented in the budget document, because we are experiencing much lower growth.
But the opposite is also true. If we can keep progressing with the reforms that have been tabled, like increased private participation in the electricity supply of the country as well as the rails and ports, we could see South Africa’s growth climbing to around 3% per annum, according to the Bureau of Economic Research. This would result in three times increase in revenue collection, which would reduce the government’s need to borrow, a cost the county cannot afford at the moment. Indeed, South Africa is currently paying 22% of its revenue towards servicing its debt costs, which equates to roughly R1 billion per day going to debt-servicing costs. Growth, however, is not a quick fix, as the 3% target will only materialise in the next three to five years, and if the GNU stays together and South Africa can continue with its reforms.
Some key reforms that are already showing a difference are visa reforms, which are moving onto an electronic system. There is already positive feedback in terms of reduced queues and quicker turnaround times in the issuing of passports. Also 36 additional countries have been added to the electronic visa system, which has seen tourist arrivals at Cape Town International airport reach record highs. Worth noting is that for every 10 tourists that visit the country, one permanent job is created, highlighting how small reforms can have big impacts.
Other reforms that are bearing fruit are more private participation coming online. Private participation in the country’s energy sector will support Eskom, which will not be able to support an economy that is growing at 3%. Last quarter we saw another very important development; the signing in of the Transport Bill, which will allow private train operators to start operating on the network. This may start happening as early as this year still, boosting South Africa’s ability to move products around the country and to ports for export.
South Africa beyond Trump’s tariffs
We need to remember that government negotiations are a give and take. While a VAT increase was opposed, when you compare this to the budget five years ago, and look at the reforms in the pipeline, it is a major change. While opening the system up to the private sector to tender, manage and run ports and rail and produce power doesn’t happen overnight, it definitely puts us in a far stronger position in two to three years.
It is therefore important that the GNU remains firm and we get these reforms on track and concluded as soon as possible, so that when the world gets through the adjustment phase of the new trade agreements with new trading partners, South Africa can put its hand up because it will be open for business.
In addition, corporate South Africa is in a strong position to contribute to the country’s readiness to transact with the world. As a collective, corporate South Africa is sitting with record-high cash balances in its books. While this reflects the concern of local businesses around investing in South Africa, their uncertainty means that they have the cash available to start making a difference. We have seen the impact this can have when we look at the investment into solar and the difference it made in terms of loadshedding. Now that the government is removing more red tape, business can start investing in the opportunities presented, especially on the logistical network side of the economy.
As a percentage of GDP, government debt sits at 80% of GDP, while corporate debt is less than 30%. That is very low compared to our peer group. This means that there is room for corporates to finance investment if they need to. This can be a huge boost for the local economy, as South Africa sits with 144 of companies in Africa, and 50 of the biggest companies in Africa, making it a solid stepping stone into the rest of corporate Africa.
Citadel Asset Management’s outlook
As Vladimir Lenin, revolutionary and head of government in Soviet Russia, said, “There are decades where nothing happens and there are weeks where decades happen.” The events at the end of the last quarter saw markets turn much more quickly than anticipated, as Trump implemented a decade’s worth of reforms in an extremely short period of time.
It is in times like these, that the importance of Citadel’s investment philosophy is reinforced. The world has gone through many crises, and they are always caused by different factors. What they all have in common, however, is that they create environments where fear and emotion take over. This emotion is what creates an opportunity for disciplined investors who then act on these opportunities.
Looking at the four pillars of Citadel’s investment philosophy, we see how they are holding us in good stead during this volatile economic time:
Diversification: This has protected our investments against market shocks.
Always looking for value: As markets respond emotionally, we can now look for opportunities when there is a sell-off in many markets, meaning we can pick up high-quality assets at good value.
The future is uncertain: This notion has been reinforced a number of times in the first quarter and will probably continue to be reinforced under the Trump administration, meaning we are prepared for any eventuality.
The importance of asset allocation: Citadel is using this volatility to buy quality assets that we want to hold for a long time, at good value. We are looking for assets that will benefit us as the world starts to normalise and get back to equilibrium and capacity growth. This will ensure that our clients who have a healthy level of shock-absorbers in the form of cash in their long-term portfolios can now start to increase their growth exposure.
While we believe that the risk of a recession is still below 50%, if this downward spiral continues, it will create further opportunities for us to eventually go overweight in equity when the time comes and the cycle turns. While our mindset is always about capital preservation we are open to opportunities. It is our job to manage the risk presented through these cycles to ensure our clients benefit from the myriad high-value investment options on offer.
While this is a volatile time in the markets, Trump’s policies will not impact our ability to deliver on portfolio growth. In fact, it may present us with excellent alternatives.
