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It is rare that the presentation of the National Budget would not be the week's main story, but this week, the focus was on the meeting between Cyril Ramaphosa and Donald Trump. It was a high-stakes meeting because so many things could have gone wrong. It is, of course, remarkable that the White House blasting ‘Kill the Boer’ footage with all members of the US and SA delegations present is not the worst thing that could have happened. But the meeting ended on cordial terms, and the SA delegation sounded positive after the closed-door session following the media event.
From an economist's viewpoint, it was encouraging that both parties seemed willing and open to talking about trade and investment. The US is an important export market for SA, but we also supply critical minerals that the US needs, so if the talks continue in good faith, a deal favourable to both sides could be made. The SA delegation spoke from the same hymn sheet. Although it certainly wasn’t positive for SA from a tourism perspective, the international media seems to have received (and is spreading) the message that the white genocide claims are unsubstantiated. A fair conclusion is that some of the tension seems to have eased, but it was not the ‘reset’ Ramaphosa was hoping for.
Moving on to the Budget, the Minister of Finance and the National Treasury had the difficult task of balancing the books without the previously proposed VAT hike and an economic backdrop that has deteriorated since their first attempt in February. As such, it is a sobering reality check on SA’s macro and fiscal position—clients can find a detailed comment here.
National Treasury’s growth and revenue outlook were revised down in line with the deterioration in global and domestic economic conditions (and, in terms of revenue, without VAT). As such, Treasury was forced to slash the massive shopping list it presented in February into something far more manageable. Net new expenditure for 2025/2026 has been halved – from R142bn in March to R74.4bn now. As a result, taxpayers will receive no inflation adjustment to their tax brackets or medical tax credits for the second year in a row, the fuel levy will now be raised after remaining unchanged for three years, and above-inflation increases to sin taxes will remain in place. Furthermore, the Treasury warned that it will impose R20bn in additional tax measures in 2026 unless it is able to achieve the requisite savings through the expenditure review process and/or the SA Revenue Service (SARS) is able to turn its R2bn additional allocation for 2025/2026 into R20bn of additional revenue by February next year. SARS expressed confidence in its ability to do this. Still, the specific warning about a possible tax hike is being made to prevent the drama that took place after the 2% VAT hike was announced unexpectedly earlier this year. This is a positive step in making fiscal policy more transparent, with the Budget Review mentioning more upcoming reforms to the process.
In the end, even with these tax and expenditure adjustments, the gross debt ratio will peak at 77.4% this fiscal year, compared to the previous target of 76.2%, continuing a familiar pattern of the country incurring a little more fiscal slippage each year.
Source: National Treasury
To add to fiscal risks, yesterday, Transport Minister Barbara Creecy approved a R51bn guarantee facility for Transnet to support capital investment, implement required reforms, and ensure that it can meet its debt obligations. This comes on top of the R47bn support facility granted at the end of 2023.
Global financial markets had a jittery start to the week after Moody’s downgraded the US’s sovereign credit rating from AAA (its last remaining such rating) to AA1 last Friday, citing concerns about its ballooning government debt. Meanwhile, also on Friday, University of Michigan data showed a sharp decline in consumer sentiment while inflation expectations rose. With a whiff of “sell America” trade setting in once again, the dollar weakened, helping to push the rand below R18/$, while US 30-year bond yields rose above 5% and nearly reached a two-decade high. In addition to higher bond yields, US share prices moved lower amid concerns about Trump’s tax bill that would add about $3.8 trillion to debt ($36.2 trillion) over the next 10 years, and this at a time when demand for US bonds is waning (Wednesday’s 20-year auction drew tepid demand). On Thursday, the Republican-controlled House of Representatives passed the bill by one vote. The bill includes measures such as tax breaks on tips, rolling back green-energy incentives while lifting spending on military and border security.
US 10-year yields are trading around the post-Liberation Day levels seen last month (in other words, at the level that made the US uncomfortable enough to ease its tariff position to some extent appease the market). It is not just the US; German yields are ticking up, and the Japanese bond market nearly collapsed, following very weak demand for a bond auction. Ahead of the auction, the Japanese Prime Minister had called the fiscal situation in Japan “extremely poor, worse than Greece’s”. Unlike the dollar, however, the yen is strengthening as yields increase (the typical market reaction), which suggests that, for now, traders are more worried about the health of the US fiscus metrics relative to that of Japan.
The rand exchange rate remained remarkably strong throughout the week, although against a weak US dollar, and was still trading below R18/$ late yesterday. In commodity markets, the oil price jumped a bit midweek on reports that Israel was preparing to strike Iran’s nuclear facilities. However, reports that OPEC+ could announce another sizeable increase in oil output following their 1st of June meeting pushed futures lower. A slightly lower oil price and a relatively stronger rand mean that local motorists should be somewhat shielded from Budget 3.0’s fuel levy increase that will kick in next month. Gold gained another 2.5% w-o-w, while platinum surged by over 9% and closed above $1 000/oz for the first time since March. In fact, it was the first time since October last year that the platinum price stayed above $1 000/oz for multiple days. In other news, Bitcoin rose above $110 000 on expectations of crypto-friendly regulation coming from the US soon.
News that would have been more noteworthy in a less busy week was that the UK and European Union (EU) announced a post-Brexit ‘reset’ of relations. The deal included allowing British travellers to use e-gates at passport control and making it easier to take pets on holiday. It also covered weapons trade, energy trading and carbon border taxes. Talks about youth and business mobility continue. The EU sent off a revised trade proposal to the US, although formal negotiations are yet to start. At the same time, it has plans in place to retaliate should Trump return to stricter tariff conditions. Meanwhile, flash PMI figures for both the UK and Eurozone released this week pointed to a contraction in activity in May (see international section below).
Finally, Trump said that peace talks between Russia and Ukraine will start immediately after he has had a two-hour phone call with his Russian counterpart. The initial takeaway from Trump’s post-call messages was that the US could be pulling back on its effort to end the war, leaving Ukraine and its allies on their own. The EU approved another sanctions package on Russia, while European countries also stepped up their critique towards Israel. Despite promises to end the blockade of food aid to Gaza, support is still failing to reach those who need it, and despite international pushback, Israel says it remains committed to take over the entire strip.
The domestic focus shifts from fiscal policy this week to monetary policy next week. The SA Reserve Bank (SARB) has an interest rate decision scheduled for Thursday. There will surely be lively discussions among MPC members, and it is unlikely to be a unanimous decision. While a strong case can be made for further easing (price pressure remains subdued with a relatively benign inflation outlook as the economy is under pressure), we believe the SARB may again err on the side of caution and keep its rate unchanged. When thinking about SARB decisions in recent months, we have started to talk about what the SARB is likely to do, and that this is not always the same as what the SARB could, or even should, do (which in our mind, would have been to cut a bit more aggressively at the start – but hindsight is 20/20 of course). That said, on Tuesday, the Reserve Bank of Australia (RBA) cut rates for a second time this year, to a two-year low, despite warning about heightened global uncertainty. However, with inflation around target and risks seen as balanced, a cut was seen as appropriate – there is a chance the SARB agrees with respect to SA. Indeed, FRA’s are pricing in a 25bps rate cut for next week.
We have the usual end-of-month data dump on Friday, and producer price inflation (PPI) for April on Thursday. Just as consumer inflation benefitted from a drop in fuel prices this week, headline factory-gate inflation should slow on the back of this too. We expect PPI to tick down from 0.5% y-o-y to around 0.1%.
Internationally, key data releases come late in the week in the form of China PMI data, and whether these show any impact of the trade war on Chinese manufacturing, and the Fed’s preferred measure of inflation. On Wednesday, the Fed minutes from its latest interest rate decision are published. While the Fed opted to keep rates unchanged in that meeting, the minutes will be studied for how it will balance its potentially conflicting dual mandate in the coming months.
Headline consumer price inflation (CPI) rose marginally to 2.8% y-o-y in April, from 2.7% in March. Following a string of downward surprises, this was the first overshoot relative to the consensus forecast (but in line with our forecast). The headline increase was driven by an acceleration in price increases of food and non-alcoholic beverages, up by 4.0% y-o-y, driven by higher prices in cereal, meat, oils and vegetables. Conversely, lower fuel prices placed downward pressure on transport costs, which declined by 3.9% y-o-y in April. On a monthly basis, headline CPI moderated to 0.3% in April from 0.4% in March. Meanwhile, core inflation, which excludes food and energy, slowed by 0.1 percentage point (% pt) to 3.0% y-o-y in April.
Stats SA released the usual slew of internal trade data for March. Retail sales fell short of market expectations, recording a 1.5% y-o-y increase following an upwardly revised 4.1% y-o-y gain in February. The softer growth was driven by a slowdown in the sales of general dealers (0.3% y-o-y in March vs 3.6% y-o-y in February), textile, clothing, footwear and leather goods (3.5% vs 16.1%) and all other retailers (1.1% vs 3.7%). Conversely, pharmaceuticals, medical goods, cosmetics and toiletries recovered by 7.1% y-o-y in March from a decline of 0.2% y-o-y in February. Compared to February, retail sales declined by 0.2% m-o-m in March. Despite this fall, retail sales increased by a modest 0.1% q-o-q in 2025Q1, remaining resilient amid uncertainty and reduced two-pot withdrawals.
Motor trade sales were up by 3.6% y-o-y, following a 5.9% decline in February. The annual increase was supported by new vehicle sales (up 15.8% and contributing 3.6% pts) and used vehicle sales (6.5%; 1.2% pts). On a monthly basis, motor trade increased by 1.9% and sales were up 0.7% q-o-q. In contrast, wholesale trade declined by 2.1% y-o-y in March, marking the third consecutive decline. Moreover, sales fell 0.1% m-o-m in March following a 1.8% slide in February. The underwhelming performance led to a 0.8% q-o-q decrease in 2025Q1.
Headline CPI in the Eurozone held steady at 2.2% y-o-y in April, unchanged from March and only slightly above the central bank’s 2% target. The biggest contributions came from services, food, and non-industrial goods, while energy prices provided a modest offset. Although unchanged from the previous month, the latest reading is still positive, suggesting that inflation is not reaccelerating.
In contrast, UK inflation accelerated more than expected, rising to 3.5% y-o-y in April from 2.6% in March. The upside surprise was driven by higher energy costs, after regulators lifted the energy price cap, and increased transport costs, particularly airfares over the Easter period. Other contributors included higher water charges and road tax.
Core inflation rose to 3.8% y-o-y from 3.4%, while services inflation, a key metric for underlying price pressures, jumped to 5.4% y-o-y (5.0% expected), up from 4.7%. With inflation proving stickier than anticipated, particularly in the services sector, the Bank of England (BoE) is now seen as unlikely to cut rates in June. The BoE is also expected to be concerned by elevated wage growth, which rose to 5.6% in Q1, further complicating the inflation outlook.
The S&P Global flash Composite PMI for the Eurozone fell to a six-month low of 49.5 in May, down from 50.4 in April. The decline was driven primarily by a sharp contraction in the services PMI (48.9 from 50.1), slipping into contractionary territory. In contrast, the manufacturing PMI reached a 33-month high (49.4 from 49)—though still below the neutral 50-mark.
The weakness in services is primarily attributed to sluggish domestic demand, rather than trade tensions, although disruptions to international logistics remain a concern. The outlook for services also deteriorated, falling to its lowest level since September 2022. On the other hand, manufacturing sentiment strengthened, reaching its highest level since February 2022, just before the outbreak of the Russia-Ukraine war.
While Eurozone activity expanded during the first four months of the year, Germany slipped back into contraction, joining France, which has now recorded nine consecutive months of PMI readings below 50.
In the UK, the flash composite PMI rose slightly (49.4 from 48.5). While the manufacturing PMI declined (45.1 from 45.4), the services PMI improved to 50.2, moving back into expansionary territory.
Firms noted weaker export sales and subdued new orders, citing ongoing trade uncertainty as a key challenge. Nonetheless, business optimism improved, reaching a five-month high, driven by a more stable global financial environment and positive sentiment in the services sector. Confidence was further supported by the recent US-UK trade deal, which provided a degree of certainty in an otherwise unsettled environment.
In the US, meanwhile, the flash composite PMI surprised on the upside (52.1 from 50.6). The increase reflects the reprieve that service providers and manufacturers felt after the 90-day pause on reciprocal tariffs. The outlook has also improved, yet worryingly, there are still major concerns over potential supply shortages due to trade disruptions.
China’s retail sales rose by 5.1% y-o-y in April 2025, down from 5.9% in March, which marked a more than 12-month high. The latest reading missed market expectations of 5.5%. While 5.1% growth remains relatively solid, the outcome reflects a continued hesitance among Chinese consumers to spend. Lingering trade uncertainty and weak consumer sentiment have weighed on household confidence, while sluggish income growth constrains consumption
Editor: Lisette IJssel de Schepper
Tel: +27 (0)21 808 9755
Email: lisette@sun.ac.za
Click here for previous editions of this publication.
Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 23 May 2025
