Good news for the rand

Although tariffs, regardless of the outcome of the 90-day pause, will likely push the United States into a recession, South Africa can avoid the same result and achieve greater economic growth than it did in 2024.

Old Mutual chief economist Johann Els explained that South Africa has a small and open economy, and what happens in the United States will inevitably affect the country.

Even though United States President Donald Trump has since announced a 90-day tariff pause, this also does not improve the outcome much.

This is because the real issue is the uncertainty caused by Trump’s on-again, off-again tariffs. “Imagine you’re a consumer or business owner – if there’s uncertainty, you put on hold any kind of spending decisions,” Els said.

Companies may hold off on hiring new employees or investing in their business, while consumers delay making big purchases like homes or cars.

Els explained that the United States economy has already been slowing for the last three years, and now this added uncertainty is pushing it further toward a recession.

Whether Trump decides to opt for the lower 10% tariffs or goes with the initial “huge” tariffs he announced on his so-called Liberation Day, this outcome seems imminent.

Even the inflationary uptick expected from higher tariffs will likely be muted later due to the United States’ weaker economy.

Els said the Federal Reserve’s current focus is on that, with the Fed likely to start cutting rates mid-year, possibly by as much as 100 to 150 basis points over the next six months.

At the same time, Europe is spending more on defence and infrastructure, especially in Germany. All of these changes should lead to a weaker dollar.

Due to this uncertainty, the dollar has already started drifting in recent weeks. Notably, Els said that a weaker dollar is generally good for emerging market currencies, including the South African rand.

The rand dodges a recession

Els said that at the start of the year, he put the probability of a recession in the United States at a very low 10%. However, Trump’s early moves and the uncertainty caused by his volatile policymaking pushed that to 40%.

After Liberation Day tariffs were announced, the probability is now above 60%, even if they are on hold now. If the United States does enter into a recession, that will have a global impact.

Fortunately for South Africa, less than 8% of its exports go to the United States. So, while it will be affected, it won’t be as significant as people might think, Els explained.

Trade from South Africa to the United States also won’t drop to 0% overnight. It’s sector-specific, and vehicle manufacturing, citrus farming, and potentially the wine industry will be the most affected.

“In South Africa, I don’t expect a recession,” Elisa said. In fact, South Africa is in a better and slightly more insulated position now than it was during Trump’s first presidency.

Importantly, because the rand is currently undervalued, Els explained that a weaker dollar will actually benefit the country’s currency.

Even though the rand weakened recently, the oil price dropped even more, which outweighed the rand’s weakness. That means South Africa is likely heading for another petrol price cut at the start of May.

In addition, he pointed out that South Africa currently has inflation well under control, falling well below the South African Reserve Bank’s 4.5% midpoint target.

If the rand stabilises as expected and the Fed starts cutting rates, the Reserve Bank will also have room to cut, likely around 50 basis points. Cutting less than the United States will support the rand even more.

“I don’t expect a local recession. I expect better growth than last year – perhaps not as strong as I expected a week or a month ago, but still quite decent. It’s not an all-fall-down scenario,” Els said.

Now is the ideal time for South Africa to start engaging with other nations, including BRICS countries, to set up more diversified trade.

“We’ve seen the example from China with the first trade wars in 2017 to 2018,” he said. They found other customers and countries that they could export to.

Els said that the same thing would likely happen with South Africa as well. Citrus and wine exporters will find other ways of selling their stock unless locals buy up their products at lower prices.

BRICS nations are already some of South Africa’s biggest trading partners, and China, for example, has even more room to support the economy.

So, between China and Europe – South Africa’s other big partners – the country’s trade is expected to remain relatively stable and avoid a recession.