Economic Review | The May Edition

In May, the US and China reached an agreement to reduce the reciprocal tariffs previously imposed on Chinese goods. Meanwhile, the UK economy posted solid growth in Q1 2025, outperforming all other G7 nations during the same period. In a significant development, Moody’s became the third major credit rating agency – after S&P Global in 2011 and Fitch in 2023 – to downgrade the US’s credit rating. South Africa’s unemployment rate increased in Q1 2025 compared to the previous quarter. At the same time, inflation remained below the South African Reserve Bank (SARB)’s 3-6% target range for a second consecutive month, prompting the central bank to lower interest rates. This led to a discussion to potentially adopt a new inflation target.

US and China agree to slash tariffs for 90 days

In May, the US and China agreed to a temporary suspension of most tariffs on each other’s goods to ease trade tensions between their economies. As part of the deal, reciprocal tariffs were reduced from 125% to 10%. However, the US will maintain a 20% tariff on Chinese imports related to fentanyl, leaving overall tariffs on Chinese goods at 30%. US Treasury Secretary Scott Bessent stated that the two countries have agreed to a 90-day pause and a significant reduction in tariff levels, noting that each side will lower their tariffs by 115%. Both countries indicated they will continue talks on trade and economic policy.

Since starting his second term in January, US President Donald Trump has implemented a wave of aggressive trade measures that have unsettled financial markets and sparked concerns about a possible recession. These tariffs, which are aimed at reducing the US trade deficit, have particularly targeted China. Previously, Trump had imposed duties as high as 145% on Chinese goods, leading Beijing to retaliate with its own measures, including limiting exports of certain rare earth minerals. News of a temporary easing of tariffs brought relief to investors.

Following the announcement, US tariffs on steel, aluminum, and auto exports remained unchanged, as these sectors were not part of the reciprocal tariffs. Chinese steel products continue to face a 45% tariff hike introduced in 2025, which, when combined with the earlier 25% tariff imposed in 2018, brings the total US tariff on Chinese steel to 70%. Market sources indicated that Chinese aluminum exports are likely to stay high in the coming months due to ongoing re-export activity. Meanwhile, they noted that Chinese imports of copper scrap from the US could gradually pick up again, if tariffs on American goods were lowered to 10%.

UK GDP growth

The UK economy expanded at its fastest rate in Q1 2025, growing by 0.7% year-on-year (y/y), according to the Office for National Statistics (ONS). This exceeded market forecasts of 0.6% y/y and marked a sharp improvement from the 0.1% y/y growth recorded in Q4 2024. The economy outperformed expectations, despite concerns about a downturn, as businesses accelerated investment and exports before Trump’s sweeping tariffs. The ONS noted that growth in the services sector was broad based, with strong performances in retail, wholesale, computer programming, car leasing, and advertising. These gains were slightly offset by declines in education, telecoms, and legal services. Overall, services grew by 0.7%, while the production sector – which includes manufacturing, mining, and energy – grew by 1.1%. The construction sector, however, did not grow during the quarter.

Economists warned that the strong start to 2025 may not be sustained. There are expectations of weaker growth later in the year due to uncertainty surrounding President Trump’s unpredictable tariff policies, especially following his “Liberation Day” announcement on 2 April. Despite these concerns, Chancellor Rachel Reeves highlighted the Q1 results as evidence that the UK government’s strategy is delivering, noting that the UK outpaced all other G7 economies during the quarter. She emphasised that the government was making the right decisions in the face of global instability. Since the 2024 election, the UK has implemented four interest rate cuts, secured two new trade agreements, rescued UK Steel, and raised the minimum wage, benefitting millions of workers.

For your interest

1. Moody’s downgrades the US

• Credit rating agency Moody’s downgraded the US government’s credit score by one notch from AAA to AA1. Moody’s became the last of the three major rating agencies to strip the US of its AAA rating.
• It cited rising debt and interest costs “that are significantly higher than similarly rated sovereigns”.

(Source: Al Jazeera, May 2025)

2. US Fed holds rates steady

• The US Federal Reserve (US Fed) kept its benchmark interest rate unchanged in May, holding the line at 4.25% to 4.5%, as it did at the March meeting.
• However, the US Fed acknowledged that since its last meeting in March, the risks of higher inflation and higher unemployment had increased, in part due to trade policy.

(Source: JP Morgan, May 2025)

3. China’s retail sales growth slows

• China’s retail sales rose 5.1% y/y from a year earlier in April, missing analysts’ estimates of 5.5% growth, according to a Reuters poll. Sales grew by 5.9% in the previous month.
• Industrial output grew 6.1% y/y in April, stronger than analysts’ expectations for a 5.5% y/y rise, while slowing down from the 7.7% y/y jump in March, indicating the impact of US tariffs was not as harsh as had been expected.

(CNBC, May 2025)

4. UK and India sign historic deal

• The UK and India have signed a free trade deal which will ‘further strengthen the UK-India strategic partnership.
• The agreement will cut levies on 90% of British products sold to the country, including whisky, food and electrical devices. The new agreement is expected to increase bilateral trade between the countries by US$34 billion a year from 2040.

(World Economic Forum, May 2025)

5. SA’s unemployment rate rises

• South Africa’s official unemployment rate rose to 32.9% y/y in Q1 2025. This is marginally lower than the highest rate of 33.5% y/y experienced in Q2 2024.
• Job losses were recorded in five of ten industries, including trade, construction, private households, community & social services and mining.

(Stats SA, May 2025)

SARB reduces repo rate by 25 bps

The SARB cut the repo rate by 25 basis points to 7.25%, with the prime lending rate at 10.75%. In his announcement, SARB Governor Lesetja Kganyago noted that global economic conditions have remained unstable since the last Monetary Policy Committee meeting. He highlighted a sell-off in US assets, while traditional safe havens like gold and the euro have performed strongly during this period.

Source: SARB, BusinessLIVE

Kganyago also warned that a combination of rising trade barriers and heightened global uncertainty is expected to dampen global economic growth, prompting the SARB to revise its global growth forecasts downwards. He noted that the outlook for global inflation was more complicated. On one hand, US tariffs and supply chain disruptions could drive inflation higher, potentially raising prices in other economies. On the other hand, slower global growth, falling oil prices, and surplus production capacity in countries like China could exert downward pressure on inflation. Given these mixed signals, the SARB anticipates a modest decline in global interest rates this year. While the US Fed has held its rates steady, other central banks, such as the Bank of England and the European Central Bank, have cut their policy rates.

The SARB has revised its GDP growth forecasts. It now expects the economy to expand by 1.2% in 2025, with growth rising to 1.8% by 2027. While the outlook for structural reforms remains encouraging, Kganyago acknowledged that global headwinds, including weaker international growth, could weigh on the domestic economy. However, the central bank views the risks to growth as balanced at this stage. On the inflation front, headline inflation fell below 3% again in April. In response, the SARB is discussing the implications of anchoring inflation at the lower end of its target range, at 3%, and what this would mean for interest rates. The SARB had previously been targeting a midpoint of 4.5% within its 3-6% inflation target range. This revision would reflect a lower base level of inflation, expectations of a stronger rand, and declining global oil prices. Kganyago also noted that previous inflation projections had factored in VAT increases, which have since been scrapped, contributing further to the downward adjustment.

Market overview

Global overview

Developed market (DM) equities climbed back into positive territory for the year with the MSCI World Index ending at 5.92% month-on-month (m/m) in US dollars. This is the best monthly return in eighteen months. Although they were also in positive territory, emerging market (EM) equities underperformed their DM peers with the MSCI EM Index ending at 4.31% m/m in dollars. The biggest contributor to the MSCI EM’s performance was Chinese equities. Magnificent 7 stocks were at the forefront of May’s rally, as strong earnings announcements drove the S&P 500’s return of 6.29% m/m in US dollars. Global property posted gains of 2.60% m/m for May, but global bonds posted losses of -0.36% m/m in the same period, both in US dollars. The FTSE 100 Index gained 4.14% m/m in pounds, with the Euro Stoxx 50 Index gaining 5.42% m/m in pounds. The Dow Jones Index was also positive for the month, at 4.16% m/m in US dollars. Japan’s benchmark Nikkei Index continued April’s gains into May, ending the month at 5.33% m/m in yen.

Local overview

South African equity markets followed global equity markets higher in May with the FTSE/JSE All Share Index ending at 3.14% m/m in rand terms.  Industrials and Resources posted gains of 2.37% m/m and 2.61% m/m respectively. Property, Financials, and Cash posted gains of 2.32% m/m, 2.47% m/m and 0.63% m/m. The bond market was positive for short-, medium-, and long-term bonds, with the FTSE/JSE All Bond Index ending the month positively at 2.73% m/m. Bonds of 1-3 years were positive at 0.81% m/m along with bonds of 3-7 years at 1.74% m/m. Bonds of 7-12 years were positive at 3.64% m/m, and bonds of 12 years and above ended positively at 3.62% m/m. The rand strengthened against the US dollar by 3.04% m/m, the euro by 3.18% m/m, and against the pound by 2.06% m/m.