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United States (US) President Donald Trump’s picking on South Africa is spiking economic uncertainty and South Africa should not underestimate what is at stake for the country’s economy and business, an economist warns.
Professor Raymond Parsons, economist at the North-West University (NWU) Business School, warns that South Africa must not underestimate what may ultimately be at stake for the South African economy and business in the face of the current sharp breach in bilateral political and diplomatic relations between the US and South Africa.
“Disinformation about the situation in South Africa and negative US statements about the country’s policies triggered a worrying spike in economic uncertainty, which is not only bad for business but also more broadly for the country.
“Apart from the growing concerns about our future with the African Growth and Opportunity Act (Agoa) and its economic significance for South Africa, a serious break in economic relations with a major trading partner like the US could have other collateral consequences for us, particularly in our quest to generate higher investment and job-rich growth.”
Parsons points out that the top priority for South Africa, as President Cyril Ramaphosa reiterated in his State of the Nation Address (Sona) last week, is higher inclusive growth and job creation, the overall thrust of the Medium Term Development Plan of the government of national unity (GNU).
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“As a small open economy that is presently aiming for a much higher gross domestic product (GDP) growth rate of 3% in the medium term, South Africa must play its cards well and smartly. To minimise the possible impact of external shocks, the country must urgently respond to the latest threats from the Trump administration and make the economy as ‘Trump-proof’ as possible.
“It is therefore necessary to do battle with disinformation about South Africa at several levels. Beyond the various political and diplomatic initiatives now underway, the business sector has a crucial role to play in the escalating saga. Affected companies in the US as well as South Africa must enlarge their spheres of influence in the face of these challenging developments.
“Chambers of commerce in South Africa and the US are intervening, but in the time ahead, affected business firms must also take positive steps to reinforce the country’s longstanding economic engagement with the US.”
Parsons says companies have suppliers and customers to mobilise for support. “Business must apply skilful and coordinated messaging that continues to advance South Africa’s national economic and strategic interests.
“Indeed, business needs to be more united than ever in mounting its case to the Trump administration and other stakeholders. However, intervention by business should be conducted in a calm and focused manner which proposes better ways, supported by facts, to manage and preserve US–South Africa economic relations in the short and longer terms.”
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Herman van Papendorp, head of asset allocation at Momentum Investments, says Trump’s policies represent a significant departure from the past and have the potential to influence asset class performance and returns, at least in the short term.
“At the very least, we should expect elevated volatility in global markets as Trump’s policy announcements (either positively or negatively) surprise current market expectations.
“From our perspective, the proposed policy framework can largely be characterised as reflationary, likely driving higher economic growth and inflation in the near term. However, the precise impact on economic expansion remains uncertain, given the policy measures’ diverse nature and varying implementation timelines.”
He says certain policies, such as tax cuts, as well as financial and energy sector deregulation, are expected to support US economic growth and, by extension, benefit the US equity market over time. “Conversely, protectionist measures, including tariff increases and stricter immigration policies, may have a contractionary effect on the US economy but an even more pronounced negative impact on global and emerging market economies and equity markets.
“We believe that policies involving tariff increases and immigration restrictions will have a clear and sustained inflationary effect on both the US and global economies. This, in turn, would exert upward pressure on nominal government bond yields.”
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Van Papendorp adds that a reflationary policy stance, when applied to an economy already operating above its potential, heightens the risk of overheating and inflation remaining above the Federal Reserve’s 2% target.
“This scenario is likely to support US equities in the near term but would present clear challenges for the US bond market. Additionally, the fiscal implications of the anticipated policies are expected to adversely affect US bonds.
“It would be a negative surprise to economies and markets should inflation rise high enough to force the Fed and other central banks to abandon their current declining interest rate paths in favour of renewed rising rate cycles.”
He points out that although relative valuations currently favour US bonds over equities, the near-term outlook suggests a moderately positive environment for equities alongside persistently weak fundamentals for bonds.
“As a result, the US equity valuation premium may persist for some time. In the near term, we therefore prefer US equities over bonds in a diversified portfolio from a fundamental asset allocation perspective.”
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Meanwhile, Sebastian Mullins, head of multi-asset and fixed income at Schroders Australia, warns that Trump’s tariff implications are three times larger than the 2018 trade war. “Expectations for 2025 were for robust US growth and a fragile recovery in other nations.
“As Donald Trump settles into the White House, his unpredictable policies have the power to turbo-charge or upend these assumptions. Investors should prepare to capitalise on any market dislocations.”
In addition, he says, Trump’s America First agenda to boost US growth will be at the expense of other economies. “With the stroke of a pen or an off-the-cuff remark, Trump’s words have the power to move markets, and he is not afraid to use them.
“US equities rallied after the market assumed a softer stance given he failed to sign into law any tariffs on day one of his term, only to announce tariffs on Canada, Mexico and China on 1 February and by 3 February defer those tariffs on Mexico and Canada for a month.“
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Mullins believes that Trump’s policies can either turbo-charge or upend growth assumptions. “Unlike the last trade war, which saw tariffs phased in, these will go into effect immediately and is likely to affect $1.4tn worth of goods, which is three times larger than the 2018 trade war. The US imports most of its goods from China, Mexico and Canada. However, Canada and Mexico are also the largest importers of US goods.
“This means not only do tariffs threaten higher inflation in the US but potentially lower growth as their exports is curtailed by retaliatory tariffs. Bloomberg Economics estimates that these tariffs could boost inflation by 0.7% but also shave off 1.2% of GDP.
“The effects will still be one-sided, as Mexico and Canada export 35% and 22% of their respective GDPs to the US, while the US exports only 1.5% and 1.2% of its GDP to Canada and Mexico. Therefore, in a war of attrition, the US will likely win. The question remains at what cost.”
Mullins warns that it is possibly not the last market upset from Trump, considering the intrinsic conflicts in his policies and approach to negotiation. “Investors should brace themselves for continued volatility in the upcoming months and years.”
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