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The launch of the second phase of Operation Vulindlela (OV 2.0) took centre stage in a relatively quiet domestic data week. After several delays, President Cyril Ramaphosa announced on Wednesday that OV 2.0 would continue with phase one reforms (electricity, logistics, etc.) and added other key, but in our opinion, difficult-to-tackle items on the to-do list. More on this below. This week also saw the BER annual conference in Sandton. Clients can read a summary by Claire Bisseker here, and find a copy of the slides here.
The key message from the conference was that SA’s growth prospects are faltering. The economy is buffeted by huge uncertainty caused by the Trump administration’s tariff tantrum and rising concern about local political instability. This has pushed the 2025 forecast down to 1.5%, in line with what Moody’s announced this week. More worrying is that the BER’s medium-term outlook is also more subdued than before. This means that, while OV 2.0 could help address concerns about the medium-term growth outlook for SA, it remains a daunting task.
During the first phase, SA’s flagship economic reform programme was very successful, particularly in the electricity sector. But with load-shedding sneaking back on us, more work needs to be done on electricity transmission, specifically to crowd in more private sector investment. Allowing more private sector participation also in ports, rail, and water is a further priority in OV 2.0. Only the reform agenda in telecommunications is considered completed from phase 1. As such, phase two looks to deepen the reform agenda by ensuring that the original set of reforms is completed, but at the same time, also expands into new areas that are critical for long-term economic growth. Addressing spatial imbalances, digitalising the government’s engagement with its citizens, and strengthening local government to improve the delivery of services are new focus areas. Digitalisation is probably the ‘easiest’ fix, but generally speaking, the to-do list for OV is now long, and hopefully the team gets the authority and capacity to implement what needs to be done – and quickly. Business Day readers can read Roy Havemann’s column on OV 2.0 here, with a research note by the Impumelelo Economic Growth Lab to follow soon.
Another key message from the conference was that “Trump is not done.” Just this week, he posted on social media about putting a tariff on foreign films. While this means nothing (yet?), pulling in services trade into the trade war would be a major escalation. It may also drastically alter the US’s position, given the focus on countries with which it has a deficit in trade of goods, given that it runs a surplus in terms of trade in services. Meanwhile, the European Union plans to impose additional tariffs on €95 billion of US exports if trade talks lead nowhere, targeting Boeing aeroplanes, bourbon and vehicles. There was a slight de-escalation yesterday with the announcement of a deal between the UK and the US, although it seems that the UK is ‘sacrificing’ more than the US. Not unexpectedly so, given the short negotiation period, the details (or lack thereof) were underwhelming. The US says more deals are imminent. The UK had concluded a trade deal with India just two days before the US one.
Staying in the US, the Federal Reserve (Fed) chair Jerome Powell kept his options open on interest rate moves going forward. While economic data has proven to remain fairly strong in the first months of 2025, sentiment has suffered, and the trade war's impact still needs to work its way through the system. As such, the Fed warns that the unemployment rate may rise (warranting accommodative policy), but so too may inflation (which would require tightening). As such, the Fed did not make changes to its interest rate settings, for now. In the EM space, Brazil hiked its policy rate to a nearly 20-year high and left the door open for further hikes. Meanwhile, the People’s Bank of China (PBoC) reduced its policy rate and lowered its reserve requirement, for the first time since September last year. In Europe, in a three-way-vote-split the Bank of England (BoE) also cut its policy rate, while Sweden kept its rate unchanged. However, the more interesting story from Europe came from German politics, where Friedrich Merz lost the first-round confirmation vote to become chancellor. Although he received sufficient support in the second round, this has not happened to any post-WWII chancellor and suggests that steering his coalition government will not be plain sailing.
Meanwhile, the decades-long conflict between India and Pakistan, both nuclear powers, is on the brink of escalating. Despite both countries initially saying they do not want to escalate matters, tit-for-tat attacks between the nations following the Pahalgam terrorist attack on April 22 have continued. In the Middle East, the situation in Gaza is turning grimmer after Israel approved a plan to seize Gaza, hold on to captured territories and displace Palestinians, while taking control of aid distribution along with private security companies. Airstrikes have intensified.
In financial markets, the rand exchange rate had a remarkable week and was trading about 2% stronger against the dollar, euro and pound by Thursday relative to the week before. While it is always difficult to pinpoint the exact driver, it is typical of the rand to appreciate sharply (it was trading near R20/$ this time last month) and then recover at a rapid pace too. A sustained streak of capital inflows in SA’s equity market has helped, with non-residents being net buyers of SA shares for the longest streak since August 2022. Despite inflows, the JSE ALSI closed 0.8% lower w-o-w. In the US, the S&P500 has fully recovered its Liberation Day losses, and prices surged higher yesterday after Trump told investors to “go out and buy stock now” ahead of the weekend’s US-China trade talks.
Stats SA is set to publish the Q1 Quarterly Labour Force Survey (QLFS) on Tuesday. This household-based survey includes an estimate for the unemployment rate. While this nudged lower in Q4, to 31.9%, the entry of school-leavers to the labour market during a quarter, when many seasonal festive season jobs are shed, often means a lift in the unemployment rate in Q1. More insight into Q1 comes from the March mining data. Unfortunately, after a quarterly decline in electricity generation and manufacturing production was confirmed this week (more below), mining is unlikely to do much better with a q-o-q decline expected.
Internationally, there will be keen eyes on April's US consumer and producer inflation data and whether these reflect any tariff impact yet. Furthermore, the US and China are set to have their first trade talks this weekend. While it is unlikely that any major agreements will result from this, financial markets will be sensitive to the news surrounding this event.
According to Stats SA, factory output declined by 0.8% y-o-y. This was better than the 3.2% drop last month, but the third consecutive decline and lower than the 0.8% growth consensus forecast. The biggest drag came from a 2.5% drop in petrochemicals (-0.5%pts), and the electrical machinery subsector (-12.2%, -0.3%pts). Output fell by 2.3% q-o-q in 2025Q1 as seasonally adjusted monthly production came in below expectations and declined by 2.2% in March 2025 versus an expected 0.4% growth. The drop in April’s Absa PMI, released last Friday, does not bode well for a strong start to Q2.
Meanwhile, amid a return of load-shedding, electricity production fell by 2% q-o-q, which will be another drag on Q1 GDP.
The S&P Global SA PMI rose from 48.3 points in March to 50 points in April as output and new orders ticked up for the first time in five months. Robust sales in the services sector supported the increase in activity, while there were modest upturns in the trading and construction sectors. Manufacturing declined—this would align with the Absa PMI tracking the factory sector specifically. As in the Absa print, due to currency weakness, input price pressures increased.
The US Fed kept its benchmark interest rate unchanged for a third straight meeting, leaving the federal funds rate at 4.25%–4.50%. Fed officials noted heightened uncertainty in the economic outlook, pointing to increased risks of both higher unemployment and higher inflation. Powell emphasised a “wait-and-see” approach. He noted that economic performance has remained strong, with GDP growth of 2.5% in 2024 and a dip in the first quarter attributable to firms bringing in imports ahead of tariffs. The labour market also remains strong, with an average of 115k jobs added over the past three months and the unemployment rate at 4.2%. Meanwhile, inflation remains elevated at 2.5%, with risks to the upside, particularly due to an uptick in expectations driven by tariffs. However, longer-term expectations remain aligned with the Fed’s 2% inflation goal.
Powell highlighted that the Trump administration is “in the process of implementing substantial policy changes,” particularly in trade, immigration, fiscal policy, and regulation. The scale of these changes has been larger than anticipated and remains in flux. If sustained, the tariff increases are expected to raise inflation while slowing growth and pushing up unemployment. Whether this inflationary effect proves transitory or more persistent remains unclear, Powell underscored that the Fed aims to ensure short-run price surges do not bleed into the long run, anchoring long-run expectations central to their strategy. While this could create tension between the Fed’s dual mandate goals, he stressed that the committee would assess conditions systematically to guide the economy back to full employment and stable inflation. The Fed reaffirmed its willingness to adjust policy if needed while continuing to shrink its bond holdings. No explicit guidance was offered on the timing of future rate moves, though officials will remain data-dependent and attentive to evolving risks.
In contrast, the BoE cut the Bank Rate from 4.5% to 4.25%, marking the fourth 25bps cut since July 2024. Two members supported a deeper cut to 4.0%, while the remaining two preferred to hold. Inflation has continued to slow in the UK, coming in at 2.6% in March. The BoE noted that inflation remains above the 2% target and that GDP growth has weakened. The labour market has also seen elevated wage growth, adding to inflationary pressure, although this is expected to ease over the remainder of the year. Furthermore, earlier increases in energy prices are expected to push inflation up to 3.5% in Q3 before declining thereafter, all else being equal. Despite this, a cut was deemed appropriate.
The BoE also pointed to rising financial market volatility stemming from global trade uncertainty, which has weighed on global growth prospects. However, they expect the UK to be less affected. Policymakers reaffirmed their commitment to monitoring the evolving situation closely, particularly amid heightened macroeconomic unpredictability. While the timing of further cuts remains uncertain, they reiterated that a “careful and gradual approach” to easing remains the appropriate course.
The final S&P Global US PMIs and ISM PMI figures were also released this week. The S&P Global US Services PMI was revised down to 50.8 (preliminary: 51.4), from 54.4 in March. The S&P Global US Composite PMI was similarly revised to 50.6 from 51.2 (preliminary) and 53.5 in March. While both remain in expansionary territory, they point to slowing growth amid heightened uncertainty around global trade. Conversely, the ISM Services PMI surprised to the upside at 51.6, up from 50.8 in March. As with other recent US economic data, respondents noted that while business activity remained steady, despite contractions in employment and trade, the uncertainty created by the Trump administration remained top of mind.
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9755
Email: lisette@sun.ac.za
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Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 09 May 2025
