Our weekly podcast by Kevin Lings

SA economy stays sluggish; US still adding jobs

In Q1 2025, the South African economy grew by 0.1% q/q and by 0.8% y/y. Over 10 years, it has grown by 0.7% a year on average while the population is growing at 1.4% a year. STANLIB Chief Economist Kevin Lings discusses sector-specific performances and policies that could stimulate growth, including infrastructure investment and deregulation.

Latest US labour market data shows the economy continues to add jobs faster than the growth in new entrants. In May, the unemployment rate was unchanged at 4.2%. However, there are signs it is getting harder to find new jobs. Kevin suggests that higher trade tariffs are likely to weaken US growth this year, but not cause a recession.

The focus areas during the week included

• The US S&P 500 gained 1.5%, after strengthening by 1.9% in the prior week. Year-to-date the S&P 500 is up only 2%, which is obviously very disappointing – especially considering that a month after President Donald Trump was inaugurated (and before his policy initiatives started to focus on import tariffs) the S&P 500 had gained 4.5%. At the end of the week the US equity market was boosted by the better-than-expected payrolls report for May, which offset another bout of trade policy uncertainty earlier in the week.

• In terms of US trade policy, tensions between the US and China are re-escalating, after disparaging social media comments about China by President Trump at the end of the prior week. Chinese officials refuted his claim that it had violated the trade deal between the two countries, and they countered with allegations that the US had breached the terms of the trade deal. Fortunately, on Thursday, Trump and President Xi Jinping held a phone call that “resulted in a very positive conclusion for both countries,” according to a social media post by Trump, which gave investors some hope that the issues could be resolved. Separately, Trump announced a doubling of import tariffs on steel and aluminum to 50%, effective 4 June. (The European Union vowed to respond to the steel and aluminum tariffs.) A US Court of Appeals hearing is scheduled for 9 June to consider a US trade court ruling that Trump lacks the authority to impose a 10% global baseline tariff and 20% fentanyl duty on China based on the International Emergency Economic Powers Act.

• The European STOXX Europe 600 Index ended the week up 0.9% as inflation slowed to below 2%, and the European Central Bank (ECB) cut interest rates by a further 25 bps. The European equity market (which is up an impressive 9.1% year-to-date) was also supported by key US employment data which allays fears of the US going into recession.

• SA’s All-Share Index had another good week, gaining an additional 2.2% in value. This is the market’s fourth consecutive weekly gain – it has risen by 14.6% year-to-date. The year-to-date gain is even more impressive in dollars, as the rand has strengthened by 5.7% against the dollar since the beginning of the year.

• Japan’s stock markets declined, with the Nikkei 225 Index down 0.6% and the broader TOPIX Index losing 1.2%. Importantly, there was no apparent agreement in the recent bilateral trade talks between the US and Japan, although the talks reinforced preparations for an agreement that could be announced in June at the Group of Seven (G7) summit.

• The yield on the 10-year Japanese government bond (JGB) fell to 1.46% at the end of the week from 1.5% at the end of the previous week. This followed a sharp rise in JGB yields in late May, driven by Japan’s worsening public finances and some concerns that the Bank of Japan (BoJ) may be tapering its bond purchases too aggressively. Ahead of the central bank’s upcoming interim assessment for JGB purchase reductions, BoJ Governor Kazuo Ueda noted that most market views supported continued tapering.

• US bond yields rose after a stronger-than-expected US non-farm employment report was released on Friday. In particular, the 10-year bond yield closed the week at 4.51%, up from 4.4% at the end of the prior week, while the two-year yield climbed from 3.92% to 4.04%. The solid labour market report for May suggests the US Federal Reserve (Fed) can continue to adopt a “wait-and-see” approach to further interest rate cuts.

• In the year to date, emerging market currencies and the rand have gained 6.3% and 5.7% against the US dollar respectively, as ongoing US policy uncertainty has weighed on the performance of the dollar. The rand was the second best performing emerging market currency in the first five trading days of the month, gaining 1.4% against the dollar (after Brazil, which was up 2.2%).

• In the first quarter of 2025, SA’s GDP grew by a very modest 0.1% quarter-on-quarter, (seasonally adjusted, but non-annualised). This compares with a revised increase of 0.4% in Q4 2024. The market expected a decline of -0.1%. Over the past year the economy expanded by 0.8%, while the GDP performance for 2024 was revised down from 0.6% to 0.5%. SA’s GDP performance in Q1 2025 was hurt by declines in mining, manufacturing, electricity production and construction. The positive sectors included agriculture, transport, retail and finance. The finance (business services) sector remains SA’s most consistent growth sector, which is understandable given that the economy has become increasingly services-based. In contrast, the mining and manufacturing sectors have struggled to gain any momentum in recent years, hurt by the deterioration in SA’s economic infrastructure, especially electricity production, as well as rail and port capacity. Excluding agriculture, GDP declined by -0.3% q/q, which is probably more indicative of the underlying growth rate at the start of 2025.

• US non-farm employment rose by 139 000 in May 2025, modestly above market expectations for an increase of 126 000 (Bloomberg), although the previous two months’ data was revised down by a substantial 95 000 jobs. Over the past six months the US has added an average of 157 000 jobs a month, while over the past 12 months the average monthly increase in employment has been 144 000. These are solid gains under most circumstances – although job gains are expected to slow over the coming months as the negative impact of high import tariffs starts to take effect. US government employment fell by 1 000 jobs in May, driven mostly by a 22 000 decline in federal government employment. Since Trump took office, the federal government has shed a total of around 59 000 jobs, which is meaningful, but still far below the job cuts Elon Musk was highlighting shortly after he joined the Trump administration. Including local and state government, over the past four months the US government has  actually increased employment,  although by a modest 33 000 jobs. This suggests that DOGE has so far had a very modest impact on government employment, and that the reduction in federal government employment was more than offset by the ongoing increase in local and state government employment.

• In May 2025, the US unemployment rate remained unchanged at 4.2%. It has remained in an extremely narrow range of 4% to 4.2% in each of the past 12 months. The figure was in line with market expectations. While the US rate of unemployment has increased from a low of 3.5% in July 2023, an unemployment rate of 4.2% is low by historical standards. The Trump administration’s efforts to control the US southern border more aggressively has already resulted in less immigration. A fall in immigration will tend to lower the unemployment rate because fewer people are being added to the labour force each month. This must be balanced against the impact of the high tariffs in terms of the outlook for the rate of unemployment.

• US job openings rose to 7.4 million in April, above forecasts for a decline to 7.1 million. The number of people voluntarily leaving their jobs (quits) declined modestly to 3.2 million, while lay-offs rose to 1.8 million. These readings still reflect a healthy labour market, as job openings exceed unemployment of 7.237 million. In addition, wage gains, on average, remain above the pace of inflation, which should support consumer spending and the economy. This means that the key labour market variable that can unsettle financial markets and weaken the economic outlook is the monthly change in non-farm payrolls, which continues to reflect solid gains.

• The US ADP employment survey for May indicated that private sector employment increased by only 37 000 jobs, well below expectations for a gain of 130 000 and the lowest monthly gain since March 2023. At a sector level, most of the job gains were concentrated on the services side of the economy, whereas goods-producing industries saw a decline of 2 000 in payrolls. The softer-than-expected ADP employment report could reflect some early evidence that firms are beginning to exercise caution towards hiring, against the uncertain policy and economic backdrop.

• In April 2025, US imports declined sharply, as expected. This probably reflects the unwinding of the surge in imports in Q1 2025 as companies built up inventories ahead of tariff increases – which is likely to be sustained over the coming months. This should deliver a material boost to second-quarter US GDP growth. However, looking through this volatility, the economy appears to be starting to reflect the effect of dramatic shifts in US trade policy. In particular, US initial unemployment insurance claims increased again last week, and continuing claims remain high, suggesting it is becoming a little more difficult to find a job, potentially pointing to cooling labour market conditions. Similarly, according to Challenger, job cut announcements continue to run at elevated levels, with more sectors reporting lay-offs.

• US manufacturing activity contracted for a third consecutive month in May, according to a report from the Institute for Supply Management (ISM). The May purchasing managers’ index (PMI) reading of 48.5% fell short of estimates for 49.5% and was the lowest reading since November. The prices index remained in expansionary territory (indicating rising prices) and was near the highest levels since June 2022. Imports plunged 7.2 percentage points to 39.9%, “as demand has reduced the need to maintain import levels from previous months, as well as due to the impact of tariff pricing,” according to Susan Spence, the chair of the ISM Manufacturing Business Survey Committee.

• Activity in the US services sector also surprised to the downside in May registering a PMI of 49.9%, the first reading in contractionary territory since June 2024. Similar to the manufacturing sector, the prices index remained solidly in expansionary territory and hit its highest level since November 2022, while new orders fell 5.9 percentage points, from 52.3% to 46.4%. Importantly, employment was a positive, with the index rising above the 50 level after two months of contraction.

• As expected, the European Central Bank (ECB) cut its deposit rate by 25 bps to 2%, representing the lowest level of interest rates in the Eurozone since 2022. Only one policymaker dissented. President Christine Lagarde said that the ECB had “nearly concluded” the latest policy cycle, which has entailed eight rate cuts since July 2024. (Over the same period the Fed has cut rates on only three occasions.) She said the current policy stance was in a “good place”, and that rate setters were not on any “pre-set path” and would continue to be led by economic data. Financial markets appear to expect one more rate reduction, probably in September, as the central bank assesses the risk to growth and inflation posed by trade policy uncertainty.

• Gross domestic product (GDP) in the Eurozone expanded by 0.6% quarter-on-quarter in Q1 2025. This is double the Eurostat’s initial estimate of GDP growth in the region. The revision signalled the fastest rate of growth for the Eurozone since the third quarter of 2022. Strong growth in Ireland and a higher German estimate drove most of the increase.

• Headline inflation in the Eurozone slowed more than expected in May 2025 to 1.9% from 2.2% in April. The market expected inflation to ease to 2%. The better-than-expected outcome was largely driven by a moderation in energy and services prices. Underlying inflationary pressures also abated, with the core inflation rate falling to 2.3% from 2.7%, while PPI inflation was measured at -2.2% y/y in April, which was also lower than expected.

• In comments to a parliamentary committee, Bank of England (BoE) Governor Andrew Bailey, who voted for a quarter-point rate reduction in May, stressed that the path for interest rates “remains downwards” but added that “how far and how quickly (rates are lowered) is now shrouded in a lot more uncertainty, frankly”.

• The private sector’s survey (Caixin) of manufacturing activity in China showed that in May 2025 production suffered its biggest decline since September 2022, reflecting the impact of US tariffs on smaller exporters. The Caixin manufacturing PMI fell to 48.3 in May from April’s reading of 50.4. In contrast, the Caixin services PMI rose to 51.1 in May from 50.7 in April. The contraction in manufacturing supports the view that Beijing needs to roll out more incentives to boost consumption to try to offset the impact of US tariff hikes. Last month, China’s central bank announced a slew of easing measures, including cutting the seven-day reverse repurchase rate, and the reserve requirement ratio for banks.